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NZ dollar recovers as market positions for Fed rate cut

Monday 8th July 2019

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The New Zealand dollar recovered some of its losses, with markets still expecting a rate cut from the US Federal Reserve this month despite strong jobs growth there.

The kiwi was trading at 66.40 US cents at 5pm from 66.20 US cents at 7:50 am. The trade-weighed-index was at 72.71 versus 72.53.

The kiwi tumbled late Friday when US non-farm payroll employment increased by 224,000 in June versus an expected 165,000. However, while the data meant that investors are no longer expecting a 50-basis point cut this month, a 25 basis-point cut is still fully priced in.

OMF Treasury Manager Stuart Ive said the kiwi may also have benefited from some importers taking advantage of the dip after Friday night's US data.

Given the FOMC rate cut is still priced in, he said that minutes from the Fed's June meeting - due Wednesday in the US - and chair Jerome Powell’s testimony to Congress are “probably the biggest scheduled factors to consider.”

Powell testifies before Congress twice this week, first on Wednesday before the House Financial Services Committee and then on Thursday at the Senate Banking Committee.

ASB Bank also said that Powell’s testimony could move the US dollar significantly as market participants will be looking for whether market pricing of a 25 basis-point rate cut in July will be ratified.

“Recent positive news on trade, coupled with Friday's blockbuster employment report, may well see Powell depict a more neutral outlook for the US Federal Funds rate,” it says.

Any gains in the kiwi, however, will be capped in the short term as ASB said it now expects the Reserve Bank of New Zealand to cut rates by 50 basis points to 1 percent by the end of the year and  “for NZ, the question is whether a 1 percent OCR will prove to be the floor,” it said.

RBNZ governor Adrian Orr is slated to speak on Thursday at a Financial Services Institute of Australasia breakfast on the government's review of the Reserve Bank of New Zealand Act, and what that means for the future of the Bank. 

The kiwi was at 95.02 Australian cents from 94.87. It was 52.99 British pence from 52.83, at 59.12 euro cents from 58.98, at 71.92 yen from 71.74, and at 4.5748 Chinese yuan from 4.5628.

The New Zealand two-year swap rate was at 1.3045 percent from 1.2880 late Friday, while the 10-year swap rate was at 1.7250 percent from 1.7030 percent.


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