New Zealand dollar jumps as RBNZ flags more hikes ahead

SYDNEY: The New Zealand dollar jumped to five-week highs on Wednesday as the country’s central bank hiked rates as expected and signalled a more aggressive path forward than even the most hawkish investor had wagered.

The kiwi dollar quickly climbed 0.5% to $0.6764, shattering resistance around $0.6735 and opening the way to retracement targets at $0.6793 and $0.6890.

The Reserve Bank of New Zealand (RBNZ) raised rates 25 basis points to 1.0% but revealed it came close to moving by 50 basis points to head off a further pick up in inflation expectations.

It also sharply revised up the projected path for the official cash rate (OCR) to peak at 3.35%, from 2.6% previously and well above market expectations.

Adding to the hawkish tone was a decision to start actively selling its bond holdings, though only by a relatively modest NZ$5 billion a year.

“The biggest surprise was the extent of the lift in the projected OCR track - higher even than our top-of-the-market forecast of 3%,” said Michael Gordon, Westpac’s acting chief economist for NZ.

“We continue to expect a series of 25bp hikes at upcoming policy reviews,” he added. “However, given how much work the RBNZ believes it has ahead of it, the risk of a 50bp move at any given meeting remains live.”

Markets now see rates reaching 2.5% by year end, up from 2.25% previously, while two-year swap rates surged 12 basis points to 2.695% and heights last visited in early 2016.

The Australian dollar was also on the rise as global markets steadied in the wake of Russia’s latest moves in Ukraine.

The Aussie stood at $0.7225, after touching a two-week top of $0.7241. The break of resistance at $0.7228 was promising but a further barrier lurks at $0.7250. Chart support lies at $0.7158 and $0.7100.

It stumbled a little when local data showed annual wage growth only edged up to 2.3% in the December quarter, when bulls had hoped for 2.4% or more.

Futures responded by slightly lengthening the odds on a Reserve Bank of Australia (RBA) rate hike as early as June.

“Today’s figures support the view that it may take some time to lift wages growth such that the ‘norm’ becomes a wage rise of 3-4%, rather than the 2% of recent years,” said Paul Bloxham, HSBC’s chief economist for Australia.

“The RBA is seeking to run the economy hot for a while to try to reset these wage settings norms.”