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NZ dollar heads for 1.1% weekly decline as investors bet on dovish RBNZ

Friday 4th August 2017

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The New Zealand dollar is headed for a 1.1 percent weekly decline as investors increasingly expect the central bank to dial back its forecasts to show interest rates on hold for even longer at next week's policy review. 

The kiwi was trading at 74.28 US cents at 5pm versus 74.39 US cents at 8am and from 73.99 cents yesterday.  It reached 75.23 in New York trading a week ago. The trade-weighted index was at 78.04 from 77.86 yesterday. 

"Ahead of the RBNZ next week, it is going to be a little bit defensive. There are some commentators saying the RBNZ could adopt a stronger dovish tone that it had previously," said Tim Kelleher, head of institutional foreign exchange sales at ASB Bank.

All 11 economists polled by Bloomberg expect the central bank to keep rates at a record low 1.75 percent at next Thursday's review. In its May monetary policy statement, the central bank's forecasts indicated that rates would remain on hold until September 2019. Since then inflation and growth have been lower than the RBNZ expected and the New Zealand dollar is around 3 percent higher on a trade weighted index basis. An unexpected dip in employment data this week only strengthened the view that rates might stay on hold for even longer. 

ASB Bank chief economist Nick Tuffley said he now expects the central bank's forecast to show rates lifting in early 2020.

The kiwi was trading at 93.28 Australian cents from 93.23 cents yesterday. Kelleher said the Aussie initially fell when the Reserve Bank of Australia trimmed its near-term forecasts for economic growth on the back of the stronger local currency. However, it swiftly bounced back. 

Looking ahead, investors will be closely watching July's jobs data in the US for clues to the timing of the Federal Reserve's plans to tighten monetary policy. Non-farm payrolls were expected to have increased by 183,000 jobs last month after surging by 222,000 in June, according to Reuters. The unemployment rate is seen falling one-tenth of a percentage point to 4.3 percent.

The kiwi rose to 56.52 British pence from 55.96 pence late yesterday after the Bank of England kept its benchmark interest rate unchanged and lowered its forecasts for economic growth, inflation and wages. It was at 4.9914 yuan from 4.9780 yuan. It rose to 62.54 euro cents from 62.46 cents and traded at 81.78 yen from 81.90 yen.

New Zealand's two-year swap rate fell 1 basis points to 2.17 percent while the 10-year swaps fell 8 basis point to 3.18 percent.


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