By Gary Howes

The pound sterling (GBP) is trading higher against the New Zealand dollar (NZD) by over a quarter of a percent on Tuesday; this as a future NZ interest rate hike is fully absorbed into the markets.

With the RBNZ monetary policy meeting approaching, the markets seem to have priced in a 94% chance that the central bank will raise interest rates.

Near term inflation expectations have risen with 1-year expectations up at 2.03% whilst 2-year expectations are at 2.33%.

Apart from GBP/NZD, a look at the latest rates shows that the NZ dollar is stable:

"As inflation expectations are firmly within the central bank’s target range, a rate increase in March is becoming increasingly possible. Nevertheless, the pound has managed to recover some of yesterday’s losses but it will be difficult for sterling to maintain these levels," says Sasha Nugent at Caxton FX.

New Zealand dollar supported by strong risk appetite

The past 24 hours have confirmed to us that the NZ currency is supported in positive market conditions.

U.S. equities rose strongly yesterday due to the rallies in health-care shares and strong German Ifo survey, the S&P index once rose to a record high yesterday and closed the day at 1847, up by 0.6%. DJI index also climbed to 16207, also up by 0.6%.

NZD/USD was supported yesterday on improved risk appetite and rose 0.6% to 0.8330.

Due to the strong economic outlook and the rising inflation rate in NZ, Citi analysts expect the RNBZ may announce to raise the interest rates by 25 bps in March, which will likely lift the NZD.

"Technically, NZD/USD may test higher to 0.8432-0.8544, with support at 0.8260," say Citigroup.

China poses risks

Countering the pro-NZD sentiment is China where concerns of a slowdown persist.

Among the G10 currencies, AUD recorded the heaviest losses against USD overnight. Once again, news out of China didn’t do good to the Aussie-complex.

"This time, it was about the weaker Yuan than fixing for the first time since September 2012 on aggressive USDCNH and USDCNY purchases on PBOC request. The PBOC plans to widen the Yuan’s trading band and does no longer want to give speculators the opportunity in one-way bets," says a note on the matter issued by Swissquote Research.

In fact the sturdy decline in USDCNY and USDCNH naturally attracted one-way speculators, and now that the Yuan is believed to be no longer significantly undervalued, there is need to taper one-way specs.

Especially while planning to widen Yuan’s trade band.