NZ Dollar Outlook: Kiwi may decline as housing measures lift rate cut chances

Monday 18th May 2015

The New Zealand dollar will probably decline this week, amid expectations increased measures to curb rising Auckland house prices will give the Reserve Bank greater leeway to cut interest rates.

The kiwi will probably trade between 72.75 US cents and 76.70 cents this week, according to a BusinessDesk survey of 12 currency advisers. Seven say it will probably drop, one says it may rise, while four expect it to remain neutral. The kiwi recently traded at 74.49 US cents.

The New Zealand dollar has fallen 3 percent since the Reserve Bank on April 30 took rate hikes off the table and said it was monitoring conditions that could prompt it to reduce rates amid weak inflation, falling dairy prices and an elevated currency. Last week, the Reserve Bank announced additional lending restrictions to try and limit the financial stability risk posed by Auckland's bubbling housing market, and at the weekend the government detailed plans to crack down on housing speculators by tightening rules on capital gains tax.

"The move by the government to boost the capital gains rules opens the door even more to the chance for rate cuts," said Stuart Ive, senior dealer foreign exchange, at OMF. "The RBNZ have clearly got plenty of bullets still in the gun and they can maybe let off a couple of those bullets just to get things back under control.

"There's a higher degree of a 25 basis point cut in June and that may also be followed up by an additional one at some point by the end of the year."

Traders are pricing in a 46 percent chance that the Reserve Bank will reduce interest rates at its June 11 meeting, according to the Overnight Index Swap curve.

Those bets may be further strengthened should inflation expectations continue to be muted in the Reserve Bank's quarterly survey scheduled for publication tomorrow. In the previous survey, firms pared back their two-year ahead expectations to an annual pace of 1.8 percent from 2.06 percent. The Reserve Bank targets inflation in a 1 percent-to-3 percent band.

Also on the radar this week is the latest fortnightly GlobalDairyTrade auction overnight Tuesday where prices are expected to remain weak.

On Thursday, the government announces its 2015 budget.

Also on Thursday, Statistics New Zealand publishes its latest migration data for April, while on Friday the ANZ-Roy Morgan consumer confidence survey is released.

Elsewhere this week, central banks in Australia, the US and England will release minutes to their last meetings, while the Bank of Japan releases its latest decision on Friday.

April inflation data will be released in Europe, the UK and the US, while manufacturing gauges will be published in the US, China and Europe.

BusinessDesk.co.nz

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