New Zealand dollar rises as RBNZ holds interest rates

The NZD/USD pair is likely to test 0.7200 as fresh multi-month high, as long as the 0.6750 support holds.

The New Zealand central bank kept its benchmark interest rate at 2.25% at the 28 April policy review as expected, and despite the RBNZ statement that the NZ dollar remains stronger than appropriate, the currency continued to hold its upward track.

The Reserve Bank of New Zealand said it remains concerned about the outlook for global growth, financial markets and the dairy sector and about the decline in inflation expectations but added that inflation rate may pick up as oil prices settle.

"We expect inflation to strengthen as the effects of low oil prices drop out and as capacity pressures gradually build," said Graeme Wheeler, the RBNZ governor.

In the quarter ended in March, consumer prices in New Zealand rose 0.4%, accelerating from a 0.1% increase recorded in the previous quarter. It compares to its neighbour Australia which has slipped into deflation in Q1.

The NZD/USD pair jumped from 0.6840 to 0.6940 following the decision before easing to 0.6900 as at 10:52 am in Singapore.

The Kiwi dollar has been keeping broadly upward since late last year and had hit a 10-month high of 0.7055 last week.

Technically, the upward crossing of short term moving averages over the 50-period average on the weekly chart earlier in April means a strong upside signal for the NZ dollar against the greenback.

Charts suggest that as long as the support at 0.6750 holds, the Kiwi currency is likely to hit the target at 0.7200, the 38.2% Fibonacci retracement of the 14-month downward move ended in September last year.

However, fundamentally, the likelihood of further easing in rates as well as worries of authorities of a stronger currency affecting exports weigh on the NZ currency.

At Thursday's review, the RBNZ said its monetary policy will continue to be accommodative and added that further policy easing may be required to ensure that future average inflation settles near the middle of the target range.

"The exchange rate remains higher than appropriate given New Zealand's low commodity export prices. A lower New Zealand dollar is desirable to boost tradables inflation and assist the tradables sector," the policy statement said.