Update due this week

08-03-2010 | Alan Williams

A full monetary policy update by the Reserve Bank this week will dictate the direction of interest rates and the New Zealand dollar going into the middle of the year.

As market interest rates have fallen over the past few weeks as a reaction to the muted recovery in the economy, the dollar has continued to ease against the US dollar and drop back to 10-year lows against the Aussie dollar.

BNZ currency strategist Mike Jones said the Reserve Bank will have no concerns about inflation. The market is picking a mid-year start to it raising official interest rates and will be watching Thursday's report to see if this likelihood is confirmed or pushed further out. In the latter case, the dollar will be pushed lower.

The kiwi was at US$0.6867 mid-morning on Friday, down from 0.6916 a week earlier. Jones describes recent movements as being "chopped round in a sideways trend" and expects this trend to continue.

The kiwi has been strong against sterling and the euro, but only because those economies are doing poorly, not because of strength here.

The dollar has traded as high as stg0.47, a post-float high, but Jones says it looks unsustainable at that level, and even at a stg0.4568 level on Friday was trading at close to 15% over-valued on long term averages. While UK election worries dominate market thinking on sterling over the next three to four months or so, the kiwi will remain strong, but he sees a correction after that, probably down to the stg0.40 level by year end.

The BNZ expects the euro to remain weak over the course of the year, with a probable move for the kiwi from the current E0.5055 to 0.51 or 0.52. Exporters should be hedging positions during any kiwi weakness.

The dollar was at Y61.18 on Friday, but Jones is expecting a sharp move higher over the course of the year, to close to Y70.00. "The yen is a funny currency," he said. "The Japanese economy is weak but the yen is strong and we think that is unsustainable."

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