Kiwi Rises Most in 4 Months as New Zealand Raises Rates

New Zealand’s dollar surged the most in four months after the central bank raised interest rates and flagged further increases, boosting demand for the nation’s currency.

The kiwi strengthened at least 0.9 percent versus all of 31 major counterparts as Reserve Bank of New Zealand Governor Graeme Wheeler said it was important to contain inflation expectations. The yen reached a four-month high versus the euro as the Bank of Japan started a policy meeting. Sterling advanced to the strongest level in 18 months against Europe’s common currency as a gauge of U.K. house prices unexpectedly increased in May. Australia’s dollar rose to an eight-week high.

“The market continues to like the New Zealand dollar purely because what the central bank is doing is so different” to what its peers are pursuing, said Jane Foley, a senior currency strategist at Rabobank International in London. “The most interesting part of the meeting wasn’t the rate hike because that was well-anticipated. It was the statement which was quite hawkish.”

New Zealand’s currency jumped 1.6 percent to 86.87 U.S. cents at 7:04 a.m. New York time, the biggest gain on a closing basis since Feb. 4. The kiwi appreciated to 86.88 cents, the highest level since May 15.

Japan’s currency gained less than 0.1 percent to 138.05 per euro after reaching 137.80, the strongest level since Feb. 6. The yen was little changed at 102.08 per dollar. The euro was at $1.3524, from $1.3532 yesterday.

Inflation Expectations

New Zealand’s central bank boosted its official cash rate by a quarter-percentage point to 3.25 percent, the third increase this year, and signaled more tightening to come.

“It is important that inflation expectations remain contained and that interest rates return to a more neutral level,” Wheeler said in a statement. The two-year swap rate climbed 11 basis points, or 0.11 percentage point, to 4.13 percent, the highest since July 2010.

The kiwi has appreciated 5.9 percent this year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Currency Indexes as investors sought higher-yielding currencies. The yen has gained 3 percent, while the U.S. dollar has weakened 0.5 percent.

RBNZ Assistant Governor John McDermott said currency traders are mis-pricing the nation’s dollar and should be taking more notice of falling commodity prices.

‘Commodity Currency’

“The New Zealand dollar is a commodity currency,” McDermott said in an interview. “It should move and if people were pricing it right, now is the time for it to be moving down.”

RBNZ expects to raise the benchmark rate another 50 basis points this year and, while forecasts are always conditional, “it would take more than what we can see at the moment” for it to deviate from that path, McDermott said.

One-month implied volatility for the kiwi against the dollar fell to 6.39 percent today, the least based on closing prices since Bloomberg started collecting the data in August 1997, tracking a decline in currency swings that has encouraged a strategy of borrowing currencies with low interest rates and investing the proceeds in a higher-yielding currency, known as the carry trade.

JPMorgan Chase & Co.’s Global FX Volatility Index was little changed at 5.89 percent after falling to a record 5.76 percent on June 6 as the Federal Reserve to the BOJ buy bonds and the European Central Bank extends stimulus.

BOJ Stimulus

The BOJ, led by Governor Haruhiko Kuroda, has kept its policy of buying about 7 trillion yen ($68.6 billion) of government bonds a month since April 2013 in stimulus that tends to weaken the currency. All 33 analysts surveyed by Bloomberg forecast the central bank will keep policy unchanged this week. Nine percent of economists surveyed from June 3 to 6 predicted extra monetary stimulus in July, down from 38 percent in the previous survey.

“I don’t think the BOJ will do anything this week,” said Koji Iwata, vice president of foreign-exchange trading at Mizuho Bank Ltd., in New York. “It’s possible Governor Kuroda will strip out expectations of additional easing in July that are held by a few people.”

The pound gained 0.3 percent to 80.38 pence per euro, and reached 80.33 pence, the strongest level since December 2012. It rose a second day versus its U.S. peer, appreciating 0.2 percent to $1.6825.

Housing Data

A measure of U.K. house prices increased to 57 in May from a revised 55 the month earlier, the Royal Institution of Chartered Surveyors in London said today. The median estimate in a Bloomberg News survey of economists was for a drop to 52.

The Australian dollar rose even as the statistics bureau said employers cut 4,800 workers in May, versus the median estimate for 10,000 additions. The number of full-time jobs increased by 22,200 and the unemployment rate was unchanged at 5.8 percent.

“The headline number was weaker,” said Divya Devesh, a foreign-exchange analyst at Standard Chartered Plc in Singapore. “The details are more mixed, hence why the overall negative reaction expected in the Aussie shouldn’t be a big move lower.”

Australia’s dollar rose 0.3 percent to 94.09 U.S. cents, after climbing to 94.14 cents, the strongest since April 15.