NZ dollar drops as RBNZ's surprise update raises expectations for August rate cut

Thursday 14th July 2016

The New Zealand dollar dropped after the Reserve Bank said it will give its view on the economy next week given the long lead-in time to the next policy review on August 11, raising expectations it may be poised to cut rates next month.

The kiwi fell to 72.04 US cents at 5pm in Wellington from 72.68 cents at 8am and 72.58 cents yesterday. The trade-weighted index dropped to 76.81 from 77.44 yesterday.

Traders are now pricing in a 60 percent chance of an interest rate cut at next month's monetary policy review after the RBNZ said it will "issue a brief update on its economic assessment" on July 21 because of the longer gap between meetings in the bank's new timetable. Before the announcement, traders had priced in a 40 percent chance the official cash rate will be cut in August.

"The markets have looked at this and gone 'maybe they're going to indicate a pending rate cut in August'," said Stuart Ive, senior dealer foreign exchange at OMF in Wellington. "The kiwi has gone from its resistance level at 73 US cents to its support level."

OMF's Ive said the update will give the RBNZ a chance to see the June inflation figures, and he's wary of rushing to form a view on what it might contain, saying the market was "hyped up" ahead of deputy governor Grant Spencer's speech on housing and macro-prudential tools last week.

New Zealand's two-year swap rate decreased two basis points to 2.18 percent, and 10-year swaps fell three basis points to 2.54 percent.

The kiwi dollar reached 14-month highs against the greenback and on a trade-weighted basis earlier this week, and Deutsche Bank New Zealand chief economist Darren Gibbs said the Reserve Bank may move to lean against the currency.

"We think it is more than likely that the exchange rate will be described as unjustified and unsustainable, and a significant drag on the inflation outlook," Gibbs said in a note. "Certainly, we think that the RBNZ would like to see the NZ dollar weaker before it sets the exchange rate assumption that will underpin the revised inflation forecast in the August MPS."

The local currency fell to a week low 94.69 Australian cents from 95.41 cents yesterday after Australian employment figures showed a big increase in full-time jobs last month.

The kiwi dropped to 75.42 yen from 75.59 yen yesterday and declined to 4.8181 Chinese yuan from 4.8518 yuan. It was little changed at 54.56 British pence from 54.52 pence yesterday and fell to 64.88 euro cents from 65.61 cents.

BusinessDesk.co.nz

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