The New Zealand dollar rose against the Australian dollar as traders became less certain that the Reserve Bank will cut interest rates next week and after Australia's central bank cut its growth and inflation forecasts.
The kiwi was trading at 92.46 Australian cents at 5:05pm in Wellington from 92.08 at 7:50am. It was unchanged at 63.63 US cents, but well down from the close in New York last Friday at 64.26 cents.
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"The market's going, 'maybe we should be a bit more circumspect'" about the chances the RBNZ will cut its official cash rate again on Wednesday, says Tim Kelleher, head of foreign exchange sales at Commonwealth Bank of Australia.
The market has gone from pricing in about a 65 per cent chance of a cut yesterday to about a 55/57 per cent chance now, Kelleher says.
At the beginning of the month, just about everybody was expecting RBNZ to cut the OCR to 0.75 per cent from 1 per cent. But doubts have been growing, especially since one of the four major banks, Westpac, is now forecasting no change.
Westpac chief economist Dominick Stephens says that he had been thinking that "a rash of downside data surprises" meant an OCR cut was likely.
But then third-quarter inflation was stronger than the RBNZ expected, the exchange rate is about 4 per cent lower than in August when RBNZ delivered its previous monetary policy statement, export commodity prices have risen a little and unemployment has remained lower than the Reserve Bank expected.
"Putting all of this together, our analysis suggests that the RBNZ's OCR forecast will be unchanged relative to August," Stephens says, though he concedes this decision is going to be "a nail biter."
ANZ chief economist Sharon Zollner is sticking to her guns, predicting not only a 25 basis point cut next Wednesday but also two more cuts in February and May next year, taking the OCR to just 0.25 per cent.
The other two major banks, Bank of New Zealand and ASB Bank, are also forecasting a 25 point cut next week.
Across the Tasman, the RBA has cut its near-term forecast for GDP this year to 2.25 per cent from 2.5 per cent previously, picking up to 2.75 per cent next year as it sees Australian growth gradually coming out of a soft spot.
It also forecast inflation would remain below its 2-3 per cent target for the foreseeable future.
Some are predicting that will mean the bank will cut its cash rate further, but the RBA itself has said additional rate cuts might backfire by hurting consumer sentiment.
The kiwi was trading at 49.66 British pence from 49.63, at 57.58 euro cents from 57.59, at 69.49 yen from 69.63 and at 4.4393 Chinese yuan from 4.4399. The trade-weighted index was at 70.09 points from 70.05.
The two-year swap rate edged up to a bid price of 1.0490 per cent from 1.0203 per cent yesterday while 10-year swaps rose to 1.5250 per cent from 1.4550 per cent.