NZ dollar holds gains as inflation heightens rate hike talk

The kiwi was little changed at 84.15 US cents at 8am in Wellington from 84.13 cents at 5pm yesterday.

The New Zealand dollar held yesterday's gains after a surprise rise in December inflation heightened expectations the Reserve Bank might hike interest rates as early as next week and as the latest Fonterra Cooperative Group dairy auction showed an increase in prices.

The kiwi traded at 83.09 US cents at 8am from 83.21 cents yesterday, holding on to most of yesterday's gain. The trade-weighted index decreased to 78.91 from 79.09.

Traders are pricing in a 46 percent chance the Reserve Bank will lift its 2.5 percent official cash rate when it reviews policy next week after government figures yesterday showed consumer prices rose 0.1 percent in the December quarter against expectations of a 0.1 percent decline. That kept the kiwi dollar supported on the prospect of higher interest rates, and a rise in dairy prices at the GlobalDairyTrade auction underpinned the view of New Zealand's strengthening economy.

"We need to see some RBNZ action before you'd expect to see any strength in the kiwi, and it can trade between 82 US cents and 84 cents until Thursday" next week when the bank reviews policy, said Sam Tuck, senior FX strategist at ANZ New Zealand. "External events, such as the US recovery, would be the main driver once we know the hiking cycle has started."

Australian inflation data today is expected to show consumer prices rose 0.5 percent in the December quarter, and investors will also be looking at a consumer confidence survey for any indication of an economic revival across the Tasman.

ANZ's Tuck said the kiwi dollar is likely to find support against its Australian counterpart until the Reserve Bank meeting next week. The local currency traded at 94.30 Australian cents at 8am in Wellington from 94.40 cents yesterday.

The kiwi fell to 86.576 yen from 87.06 yen yesterday ahead of the Bank of Japan's policy review, which is expected to keep the status quo.

The local currency declined to 50.42 British pence from 50.64 pence ahead of UK employment figures which are expected to show a decline in the unemployment rate, and minutes to the Bank of England's last meeting. It slipped to 61.29 euro cents from 61.42 cents yesterday.