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NZ dollar falls ahead of RBNZ governor's speech on macro prudential policy

Tuesday 20th August 2013

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The New Zealand dollar weakened in anticipation Reserve Bank governor Graeme Wheeler will detail imminent plans to limit low equity house lending, which may reduce the need for interest rate hikes.

The kiwi fell to 80.64 US cents at 8am in Wellington from 81.18 cents at the 5pm market close yesterday. The trade-weighted index declined to 75.87 from 76.22 yesterday.

New Zealand's central bank, concerned about spiralling house prices causing financial instability, has consulted about the use of new tools which would force trading banks to restrict low equity mortgage lending. Governor Wheeler may detail plans to implement the loan-to-value ratio restrictions at a speech today where he is scheduled to explain the role of macro-prudential policy.

The speech "will be the major focus for New Zealand markets, containing details on the size and timing of pending speed limits on high LVR mortgage lending," Mark Smith, senior economist at ANZ New Zealand, said in a note. "We expect an imminent introduction of macro-prudential policy. This may weigh on NZD, as should it work it would reduce the requirement for interest rate increases."

Still, the central bank's plans have been well telegraphed and the impact should already be priced in, Smith said. The speech is at 2pm.

"We expect a tiered set of limits to be announced, with the potential for a more restrictive set of restrictions than previously signalled to be introduced to give the measures more teeth," Smith said.

The central bank has said it would give trading banks at least two weeks to implement the restrictions, and with its September Monetary Policy Statement only about three weeks away, the bank will be "cutting it fine" should it want to introduce changes ahead of then, Smith said.

Traders are pricing in 76 basis points of interest rate hikes by New Zealand's central bank over the next 12 months, according to the Overnight Index Swap Curve. New Zealand's benchmark rate is at a record low 2.5 percent.

Separately, the Reserve Bank is scheduled at 3pm today to publish its survey of 2-year-ahead inflation expectations. While of interest, they are unlikely to be market moving, Kymberly Martin, markets strategist at Bank of New Zealand, said in a note.

Surveyed expectations have been trending down since mid-2011 and at 2.1 percent, now sit close to the Reserve Bank's central target, Martin said.

The New Zealand dollar advanced to 88.49 Australian cents from 88.11 cents yesterday ahead of the 1:30pm release of the Reserve Bank of Australia minutes from its August meeting where it cut the benchmark interest rate a quarter-point to 2.5 percent.

The kiwi slipped to 60.48 euro cents from 60.92 cents after Germany's Bundesbank said the European Central Bank's low interest rate pledge didn't rule out interest rate increases should greater inflation pressures emerged.

The local currency weakened to 78.64 yen from 79.20 yen and slid to 51.54 British pence from 51.95 pence.

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