NZ dollar tumbles vs Aussie after RBA minutes, extends slide on inflation outlook

Tuesday 17th May 2016

The New Zealand dollar declined against its Australian counterpart after minutes of the last Reserve Bank of Australia meeting showed some reluctance to cut rates at the May 4 meeting and extended its decline after a survey showed inflation expectations remain weak.

The kiwi fell to 92.50 Australian cents as at 5pm in Wellington, from 92.96 cents late yesterday. It rose to 68.05 US cents, having lifted with the Australian after the RBA minutes, before retreating after the Reserve Bank's quarterly survey of expectations, from 67.71 cents yesterday.

The Australian dollar jumped almost 1 US cents after the minutes of the May 3 RBA board meeting showed there was some reluctance to cut the cash rate with some preferring to wait for more data, although the bank did cut the rate to a record low 1.75 percent. That rate cut opened up a 50 basis point gap with the Reserve Bank of New Zealand's rate. Odds of an RBNZ rate cut at its June 9 meeting rose slightly after the survey showed inflation one-year out was seen at 1.22 percent from the 12-year low 1.09 percent in the previous survey while the two-year ahead figure barely budged at 1.64 percent from 1.63 percent.

"The market read the RBA minutes as the RBA rate cut call was closer than expected. the Aussie dollar rallied on the back of that and dragged the kiwi up," said Tim Kelleher, head of institutional FX sales at ASB Bank. "The inflation expectations came out and the kiwi drifted off a bit. Inflation was hardly up so it doesn't show any great signs of recovery" and lifts the chances of a rate cut in June.

Traders will now be looking ahead to the GlobalDairyTrade auction overnight, given the importance to New Zealand's economy of its biggest export, dairy products. Whole milk powder prices may be relatively flat at the auction, according to traders who track the NZX futures market.

Futures contracts from May through September last traded slightly ahead of their GlobalDairyTrade equivalents, "predicting a slight rise for WMP though it's a marginal call and could be flat", OMF said. Skim milk powder futures contracts suggested a gain of about 5 percent and the overall GDT would likely be flat, the firm said in a note.

The trade-weighted index rose to 72.71 from 72.55. The New Zealand dollar advanced to 60.16 euro cents from 59.86 cents, increased to 4.4361 yuan from 4.4184 yuan and was little changed at 47.03 British pence from 47.13 pence.

The kiwi rose to 74.18 yen from 73.62 yen after Japanese officials reiterated they were willing to intervene to weaken the nation's currency.

The two-year swap rate rose 2 basis points to 2.21 percent and the 10-year swaps rose 4 points to 2.86 percent.

BusinessDesk.co.nz

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