NZ dollar gains on inflation expectations

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The New Zealand dollar rose after a central bank survey that showed inflation expectations are on the rise.

The kiwi dollar traded at 73.58 as at 5:15pm in Wellington from 73.20 cents in Asia yesterday. The kiwi rose to 95.93 Australian cents from 95.48 cents late yesterday.

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The local currency got a lift after a Reserve Bank survey showed that inflation expectations had moved higher. Expectations for inflation one year out rose to 1.56 per cent compared to 1.29 per cent in the Reserve Bank's last survey three months ago. The two-year ahead figure rose to 1.92 per cent from 1.68 per cent, according to the survey. While the central bank is widely expected to keep rates on hold at 1.75 per cent on Thursday, the data added to the view it may lift its projected track for interest rates.

In November the central bank forecast rates would likely remain on hold at 1.75 per cent through 2019. While economists are widely expecting the first rate hike to come sometime in 2018, Sheldon Slabbert, a sales trader at CMC Markets in Auckland, said the survey "is probably seeing the market reprice the kiwi in line with rate expectations." He said the data added to the view the next move will be a hike "and a hike that's happening this year, not 2018 as most pundits have expected so far."

News that central bank Governor Graeme Wheeler is leaving the helm in September and will be temporarily replaced by Deputy Governor Grant Spencer did not cause much market impact as there will be a succession plan in place, said Slabbert. News that the Reserve Bank of Australia kept rates on hold at 1.5 per cent also didn't move the kiwi much as the decision was largely as expected although the rate differential will continue to support the local dollar against the Australian dollar.

Looking ahead, he said geopolitical risk in Europe and any headlines generated by US President Donald Trump will remain in focus. The overnight GlobalDairyTrade auction will also garner investor interest with whole milk powder prices expected to slip.

The kiwi rose to 68.72 euro cents from 67.90 cents late yesterday. It was at 59.02 British pence from around 58.65 and traded at 5.0586 yuan from 5.0196 yuan. It was little changed at 82.33 yen from 82.30 yen. The trade-weighted index was at 80 from 79.38 late yesterday.

New Zealand's two-year swap rate rose 1 basis point from Friday to 2.37 per cent while the 10-year swaps fell 7 basis points to 3.47 per cent. New Zealand markets were closed Monday.