NZ dollar drops below 70 US cents after Reserve Bank flags rate cuts

Thursday 21st July 2016

The New Zealand dollar fell dropped below 70 US cents and weakened against most all the major currencies following a Reserve Bank update that signalled further interest rate cuts are looming.

The kiwi traded at 69.88 US cents at 5pm in Wellington, up from 70.56 late yesterday. The Trade Weighted Index fell to 74.97 from 75.68 yesterday.

The RBNZ today said "further easing is likely", with the currency 6 percent above forecasts in its June monetary policy statement forecasts on a trade-weighted basis. That was making it difficult to meet its mandated target of keeping inflation between 1 percent and 3 percent in the medium term, the central bank said.

The update coincided with all the major Australian-owned banks in New Zealand adopting new macro-prudential restrictions on property investor lending some six weeks earlier than the RBNZ's timetable of a Sept. 1 implementation. The initiative is intended to limit the spillover of further OCR cuts on an already booming property market.

Tim Kelleher, head of institutional FX sales at ASB Bank said the kiwi could have fallen further.

"I probably would have thought it could have gone a bit lower. It's gone down through fairly key levels into its current zone. But we are still three weeks away from any meeting," he said, adding that the kiwi would now need off-shore sellers to push it lower. The currency is most actively traded in international markets, making overnight trading the next text of the RBNZ's action today.

The next monetary policy statement is due on Aug. 11. The official cash rate is currently at a record low of 2.25 percent although bank economists now expect a cut to at least 2 percent next month and potential to go to 1.75 percent in November.

The kiwi strengthened slightly against the Japanese yen, the only positive gain for the local currency. It reached 74.84 yen from 74.80 yesterday. That follows talk of more monetary policy easing as Tokyo tries to stimulate an economy that's grappled with deflation for more than two decades.

The pound continued to strengthen against the kiwi after hitting a low of 56.37 pence to the dollar on July 8. It's currently trading at 52.80, but Kelleher warned that was due to "kiwi weakness, rather than sterling strength. The pound has barely moved against the US dollar."

The New Zealand dollar fell to 93.30 Australian cents from 94.08 cents and hit 63.34 Euro cents from 64.04 cents. Against the Chinese yuan, it was down to 4.6620 yuan from 4.7156 yuan.

The two-year swap rate fell six and a half basis points to 2.017 percent from 2.075 percent. The 10-year swap rate fell four and a half basis points to 2.4425 percent from 2.485 percent.

BusinessDesk.co.nz

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