NZ Dollar Outlook: Kiwi may advance as RBNZ seen cutting rates less than some traders expect

Monday 20th July 2015

The New Zealand dollar may advance this week as the Reserve Bank disappoints some traders positioned for an aggressive interest rate cut of 50 basis points by limiting its reduction to a quarter point.

The kiwi may trade between 63.50 US cents and 67.05 cents, according to a BusinessDesk survey of 11 currency advisers. Six expect the kiwi to gain, four bet it will fall and one says it will remain little changed. It recently traded at 65.22 US cents.

The local currency dropped sharply last week after a slump in milk powder prices at the GlobalDairyTrade auction fuelled calls for the Reserve Bank to cut interest rates more aggressively to prop up the country’s biggest export sector. Traders increased their bets for the kiwi to decline after some economists said there was an outside chance the central bank could reduce the benchmark by 50 basis points this Thursday, although most say they expect the rate will be reduced only 25 basis points.

"People have positioned themselves with the kiwi for the RBNZ to become very aggressive," said IG Markets chief market strategist Chris Weston. "My personal belief is that they will cut by 25, and markets are pricing in a small chance, a 12 percent chance, that we get 50 basis points - they won't cut by that amount.

"If they adopt a wait and see, let's see how things play out now, given what's happened with dairy prices and milk prices, then I think people will look to cover some of those short positions."

The central bank last cut interest rates by 50 basis points following the Christchurch earthquakes more than four years ago.

"A 50 basis point cut would be a sign of desperation, I don't think they'd want to do that, I think they would rather do back to back than cut 50 basis points. I think that would send a pretty startled message to the market," said Weston.

While the longer term trend for the kiwi is a decline, there is a lack of major economic data out to drive currency lower this week, Weston said. New Zealand has June data for immigration tomorrow and trade on Friday. Those expecting the kiwi to decline pointed to the risk of a 50 basis point cut and a dovish statement from the Reserve Bank.

In Australia, the Reserve Bank releases the minutes to its last meeting tomorrow. On Wednesday, Reserve Bank of Australia governor Glenn Stevens is scheduled to speak in Sydney to the Anika Foundation and data is released on second quarter inflation, while a business confidence survey is due Thursday.

The US is scheduled to release housing data and a manufacturing gauge this week. In the UK, the Bank of England releases the minutes to its last meeting and June retail sales are due out. In Europe, Greek banks are set to reopen today, though capital controls will remain in place. European consumer confidence is scheduled for release as well as manufacturing gauges.

BusinessDesk.co.nz

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