NZ dollar hits 15-month high after Wheeler's rate cut disappoints

Thursday 11th August 2016

The New Zealand dollar rose to a 15-month high after the Reserve Bank's quarter-point rate cut disappointed some traders who had been picking an even bigger reduction to the official cash rate.

The kiwi rose as high as 73.41 US cents after the policy decision was announced, and was trading at 72.60 cents at 5pm from 72.02 cents immediately before the release and 72.13 cents yesterday. The trade-weighted index climbed to 76.83 from 76.28 yesterday, still above the 76 September quarter average projected in the Reserve Bank's latest forecast.

Traders had priced in an outside chance governor Graeme Wheeler would cut the OCR 50 basis points today and were disappointed when he only lowered it by 25 points. Wheeler indicated more easing was likely and said the strength of the currency was making it difficult to meet his 1-to-3 percent inflation target band. If the kiwi doesn't depreciate as the Reserve Bank assumes, an alternative scenario indicated the bank could cut the benchmark rate to as low as 1 percent.

"The market was looking for 50 points more than we probably thought," said Mitchell McIntyre, senior corporate FX dealer at NZForex in Auckland. "Most banks are calling for another one or two cuts out of New Zealand over the course of 2016, but I don't think it's going to do too much to drive the currency lower unless they do come out and do 50 in one hit."

NZForex's McIntyre said he expects the kiwi to trade between 69 US cents and 72.50 cents until the Federal Reserve gives clearer guidance on when it will resume raising interest rates.

New Zealand's two-year swap rate rose 2 basis points to 1.96 percent and 10-year swaps fell 2 basis points to 2.38 percent.

The local currency rose to 94.30 Australian cents from 93.68 cents yesterday and gained to 4.8209 Chinese yuan from 4.7919 yuan. It climbed to 73.62 yen from 73.02 yen and increased to 55.79 British pence from 55.18 pence. It rose to 65 euro cents from 64.66 cents yesterday.

BusinessDesk.co.nz

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