New Zealand Dollar

The New Zealand Dollar pushed sharply higher as third-quarter Consumer Price Index data showed the annual inflation rate had registered at 1.7%, a reading far higher than the expected 1.1% result. On a quarterly basis, prices grew 1.3% from the three months through March, the most in a year.
The outcome fed expectations that the central bank will need to raise interest rates sooner than the “latter part of 2010” estimate that RBNZ Governor Alan Bollard offered at the last policy meeting in September, pushing up a Credit Suisse index of traders’ 12-month yield expectations by 9 basis points (5.84%) and driving buying interest in the antipodean currency.
This catalyst may not prove lasting however, considering the policymakers will be wary of acting on rates to protect the still very fragile export sector. Indeed, both the central bank and government have been very vocal about the detrimental effects of a higher Kiwi dollar in driving away foreign demand.
Overseas sales make up over 30% of the economy’s total output, so any policies that stand to hurt firms catering to foreign markets stands to stunt the fledgling economic recovery of recent months.
In fact, the RBNZ may have already embarked on a somewhat covert tightening campaign aimed at checking inflationary pressure while minimizing the impact on the NZD exchange rate.
The central bank “leaked” an announcement that it would end some of its emergency lending programs enacted amid the credit crunch in November, a fact that it did not officially confirm via an official news release until about a day later.
This move will gradually slow the flow of liquidity into the economy, reducing the pace of money supply growth and acting against inflation. Policymakers’ approach to the announcement suggests they were consciously trying to avoid a snow-ball effect that would send the New Zealand Dollar steeply higher.
It also hints that perhaps this approach to tightening will be seen as sufficient to stick with rates at current levels until the second half of next year as scheduled