Kiwi firms as RB signals tight money

Press, 8 October 1987, Page 25

Kiwi firms as RB signals tight money

MARTIN FREETH

of NZPA

The New Zealand dollar surged to yet another post-float high yesterday as the Government signalled its determination to beat inflation with tight monetary policy. The kiwi dollar traded up to U566.45C after a strong statement from the Reserve Bank, pointing to the persistence of "unduly high" inflationary expectations and lifting the penalty margin for rediscounting Government stock.

Dealers In Government stock said it was largely a symbolic gesture, likely to hold rates up and add nervousness to the market The indicator fiveyear Government stock rate kicked up only slightly.

On the foreign-ex-change market, the bank’s statement was expected to support further advances by the kiwi dollar, now at levels unforeseen even recently by traders and forecasters. The bank raised the margin above market

rates at which institutions can sell short-dated bonds back to it from 1 per cent to I.S per cent The margin would be reviewed as appropriate to ensure the maintenance of a continued firm monetary policy stance, the bank added.

The Governor, Mr Spencer Russell, said recent forecasts and survey data, with rates on mediumterm stocks and high prices and financing costs being paid for housing, pointed to continued high inflationary expectations. "Breaking the cycle of entrenched expectations" was the key element in the bank’s strategy to achieve low inflation and to do so In a way minimising the real costs of adjustment

“The maintenance of a firm monetary policy stance does involve real sector costs in the short term, a faster adjustment to low sustainable rates of inflation will hasten a return to more rapid rates of growth in real economic activity and employment” Mr Russell added. Dealers said trading in

Government stock had been very quiet for weeks and could not be expected to quicken until rates showed definite signs of falling. The five-year rate, around 16.30 for a month, could not breach 16.40 after yesterday’s announcement

Foreign exchange dealers said it did give support to the interest rate differential above other countries. "Given that the G 7 (leading industrialised) countries are not keen on raising their interest rates and given our position, that still means just one thing for the kiwi,” a dealer said.

He and others pointed to a “very bullish" sentiment attached to the kiwi dollar Internationally since Labour’s solid election victory in August and Its promise of persistence in economic deregulation. Since the beginning of September, the currency has appreciated 9 per cent against the U.S. dollar and almost 8 per cent against the Australian dollar (to Aust9l.B3c yesterday). The Reserve Bank’s index, indicates a 20 per cent revaluation in exchange rates against this country’s main trading partners since the float (62.7 on March 4, 1985). On the Wellington foreign-exchange market, the kiwi dollar traded as high as U50.6633C earlier in the day after being bid up in New York overnight and being bought steadily by local companies. The day’s opening was U565.80/90. “People are still looking for levels to buy and I think it will now go higher,” a dealer said.

After the kiwi dollar’s early surge, the market found itself long and trading in the unit was beginning to test the downside before the bank’s statement, another dealer said. At the close of trading, the kiwi dollar was quoted at U566.23/33. Dealer*, said they ex-

pected the kiwi dollar would now firm further against the US unit, perhaps testing US67c today.

The Reserve Bank’s trade-weighted index closed at a post-devalua-tion high of 75.7, against Tuesday’s close at 74.7. Before the float in March, 1985, the index was 62.7. In Sydney yesterday the Australian dollar finished higher, buoyed by Japanese buying, but the gains were checked by fears of Reserve Bank sales at the higher levels.

The currency finished at U572.18/23C, up from Tuesday’s U571.87/92 close, but off its peak of U572.25C. It opened in Sydney yesterday around U572.12/19. Traders said buying from Japan at U 572.10 lifted the dollar quickly to its highs. But trading was otherwise dull and the outlook was mixed.

The Australian dollar was steady at 56.3 on the Reserve Bank’s trade weighted index. Against the New Zealand dollar it finished at SNZI.OB9B, from $NZ1.0960. In New York on Tuesday (early yesterday, N.Z. time), the American dollar retreated against all key currencies except the Japanese yen.

Currency dealers said technical factors were mostly responsible for moving the market

“I think the market will focus more on next week’s economic figures,’’ said Mr Ronald Holzer, chief dealer for Harris Trust and Company, in Chicago.

The American Government is scheduled to release its August merchandise trade report next Wednesday. A negative note to today’s market was widespread speculation that West Germany was moving to raise interest rates to keep inflation in check, said Mr James Vick, vice-president and senior corporate trader for Manufacturers Hanover Trust Company in New York. In New York, the U.S. dollar stood at 146.84 Japanese yen, up from 146.55 yen on Monday. The British pound fetched 1.6337 dollars, up from 1.6285. Other dollar rates in New York, compared with Monday’s close: 1.83285 marks, down from 1.83955; 1.5303 Swiss francs, down from 1.5330; $Can1.30375, down from $Can1.30825; 6.1025 French francs, down from 6.1205; and 1323.375 Italian lire, down from 1327.00.