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NZ dollar tumbles as CPI reaffirms rate cut expectations for mid-2010

Wednesday 20th January 2010

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The New Zealand dollar tumbled 0.6% after the Consumer Price Index unexpectedly shrank last quarter, pushing out the likely timing of interest rate increases by the Reserve Bank.

The currency dropped to 73.50 U.S. cents from 73.91 cents immediate before the announcement after the CPI contracted 0.2% in the three months ended Dec. 31, according to Statistics New Zealand data. While this met the Reserve Bank’s expectations, it fell short of market forecasts, which were picking a 0.2% expansion in the index according to a Reuters survey.

“Markets were looking for a stronger result than the Reserve Bank,” said Danica Hampton, currency strategist at Bank of New Zealand. “The kiwi will need to break below its overnight low of 73.33 to head lower, it'll just keep trading in familiar ranges. There’s a little support at 73.60 cents, and fundamentally, there should be buyers on dips.”  

The market was betting central bank Governor Alan Bollard would be forced to begin tightening monetary policy earlier than the “middle of 2010” indicated in last month’s monetary policy statement, and today’s data will damp expectations of a hike in April that some economists were tipping.

Debt collection agency Dun & Bradstreet predicts Bollard will keep his timing in its 2010 Economic Outlook and Risk Report as inflation expectations remained muted at the end of last year.

Still, traders are betting the Reserve Bank will hike interest rates by 200 basis points over the coming 12 months, according to a Credit Suisse Index based on the Overnight Index Swap curve. The Reserve Bank expects annual inflation to hit a trough in the September quarter this year at 0.9%, below its target band of between 1% and 3%.

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