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NZ dollar heads for 1.5% weekly fall on RBNZ signals; FOMC looms

Friday 22nd July 2016

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The New Zealand dollar is heading for a 1.5 percent weekly decline against the greenback, reflecting the Reserve Bank's signal that it needs to cut interest rates to drive down the currency and stoke inflation.

The kiwi traded at 70.03 US cents at 5pm in Wellington, from 69.88 cents late yesterday and down from 71.09 cents a week ago. The trade-weighted index was at 75.06, little changed from 74.97 yesterday and down from 76.01 a week ago.

Traders are pricing in an 89.6 percent chance that governor Graeme Wheeler will cut the official cash rate to 2 percent with the monetary policy statement on Aug. 11. Still, the US Federal Reserve may be the wild card in the short term, with the Federal Open Market Committee due to meet next week and some members keen to see an increase in US interest rates this year, which would drive up the greenback.

"The impact of an RBNZ interest rate cut is largely priced in," said Chris Weston, chief market strategist at IG Markets. "For me, it's a done deal. Why would they leave rates on hold, given everything they've said? The RBNZ has a great history of doing what they say they'll do."

Weston said there's a "good chance" the RBNZ will cut again on Nov. 10, the next MPS following the review in August.

Economists expect the Fed will keep its key rate unchanged within the range of 0.25 percent to 0.5 percent. But Weston said a number of committee members "are pushing hard for them to raise rates this year."

The Fed is likely to signal it is keeping all options open and while Weston says he thinks the US central bank should keep rates low for a long period of time, signs of stability in economic data and minimal impact from Brexit could see the greenback rally in expectation of rate increases, he said.

The kiwi dropped to 74.10 yen from 74.84 yesterday, when Bank of Japan governor Haruhiko Kuroda ruled out 'helicopter money' - where a central bank buys perpetual bonds with no maturity date - as a means to stir inflation in the world's third-biggest economy. 

The local currency rose to 63.54 euro cents from 63.34 cents after the European Central Bank left monetary policy unchanged, and president Mario Draghi said he was still willing and ready to act in response to the UK's vote to leave the European Union, if need be. The kiwi traded at 52.97 British pence, up from 52.80 pence yesterday. 

The New Zealand dollar rose to 93.64 Australian cents from 93.30 cents yesterday and rose up to 4.6749 Chinese yuan from 4.6620 yuan. 

The two-year swap rate rose about 2 basis points to 2.03 percent and the 10-year swap rate fell about 1 basis point to 2.43 percent.

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