NZ dollar roars ahead against sterling after RBNZ surprise

The New Zealand dollar lived up to its reputation as a mouse that can roar as it stormed ahead on sterling after Reserve Bank of New Zealand (RBNZ) surprisingly held its key interest rate at 2.25% overnight.

Foreign currency traders had anticipated RBNZ would cut its benchmark rate to 2.0%.

At 12:59 BST, sterling was down 1.71% to fetch NZ$2.0349, while the dollar was down 1.42% to buy NZ$1.4058.

"The (NZ) central bank made it very clear that the door for further easing has been left firmly ajar," said Rabobank Financial Markets Research (RFMR).

"It is fair to say that the poorer tone of the USD on the back of last Friday’s release of the shockingly weak US non-farm payrolls report has facilitated the rise in the value of NZD/USD in recent session," said RFMR in a research note.

"That said, we would question whether the NZD can sustain these gains given other signs that risk appetite may be waning."

Barclays Bank said it expected the pressure for further easing by RBNZ to remain, and for tightening of 25 basis points in the final quarter of 2016.

"Short-term inflation expectations remain at low levels and New Zealand's key export goods prices continue to lag those of other commodities," Barclays said in a research note.

"Further macro-prudential measures, such as strengthening loan-to-value ratios and/or DTI (debt-to-income) measures are likely to be introduced," it added, noting a pickup in house-price inflation and continued weakness in dairy prices.