NZ dollar declines amid US dollar strength, outlook for lower NZ interest rates

Tuesday 19th May 2015

The New Zealand dollar declined as the greenback strengthened on optimism the US economy will rebound after a weak first quarter, and as the kiwi is weighed down by expectations local interest rates will fall.

The kiwi slipped to 73.73 US cents at 8am in Wellington, from 74.33 cents at 5pm yesterday. The trade weighted index dropped to 75.96 from 76.29 yesterday.

The US dollar index, which measures the greenback against a basket of currencies, gained after the Federal Reserve Bank of San Francisco published research yesterday saying the US economy is probably not as weak as current estimates suggest, bolstering the argument for raising US interest rates. The New Zealand dollar remains weak ahead of the Reserve Bank's second quarter survey of inflation expectations today, which is expected to strengthen the case for local interest rate cuts.

"The San Francisco Fed published a paper that further reinforced the Federal Reserve Open Market Committee view that first quarter GDP (gross domestic product) weakness was seasonal in nature, helping to support the US dollar," ANZ Bank New Zealand senior economist Mark Smith and senior FX strategist Sam Tuck said in a note. "The New Zealand dollar continued to weaken as markets digested the twin prong approach to housing that frees up monetary policy decision making. RBNZ 2yr ahead inflation expectations will be a driver for NZD today, with expectations for declines."

ANZ expects the kiwi to trade between 73.10 US cents and 74.60 cents today.

Traders are pricing in a 48 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 at 3pm. In the first quarter, 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 1-3 percent band.

ANZ, Deutsche Bank, Kiwibank and RBC Capital Markets expect the Reserve Bank to cut the 3.5 percent benchmark interest rate by 25 basis points at its June 11 meeting, while ASB Bank and First NZ Capital expect the first reduction to come in September.

Also today, Statistics New Zealand will release data on first quarter capital goods prices, farm expense prices and producer prices at 10:45am.

Tonight, the focus will be the latest fortnightly GlobalDairyTrade auction where prices are expected to stabilise at low levels.

The New Zealand dollar slipped to 92.29 Australian cents from 92.62 cents yesterday. The Reserve Bank of Australia publishes the minutes to its last meeting today.

The local currency advanced to 65.19 euro cents from 65 cents yesterday, declined to 47.09 British pence from 47.25 pence, and fell to 88.46 yen from 88.91 yen.

BusinessDesk.co.nz

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