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NZ dollar drops to week-low as lower inflation seen weighing on interest rates

Friday 24th October 2014

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The New Zealand dollar declined to a week-low after data yesterday showed inflation accelerated at a slower than expected pace in the third quarter, suggesting interest rates may stay at current levels for longer.

The kiwi fell as low as 78.05 US cents, and was trading at 78.18 cents at 8am in Wellington, from 78.52 cents at 5pm yesterday and 79.09 cents immediately before the inflation data release yesterday morning. The trade-weighted index declined to 76.25 from 76.47 yesterday.

New Zealand consumer prices are accelerating at an annual rate of 1 percent, lagging the Reserve Bank's 1.3 percent forecast and at the bottom of the bank's 1-3 percent target band. Lower inflation means the Reserve Bank will probably hold off raising the official cash rate until late 2015, according to economists.

"The NZD/USD dropped like a stone yesterday morning after the release of NZ Q3 CPI," Kymberly Martin, Bank of New Zealand senior market strategist, said in a note. "The low-side reading has caused the market to further reduce OCR expectations."

Most economists expect the Reserve Bank to keep the benchmark interest rate on hold in March next year, while about half expect the rate to have increased by June and three quarters expect it to have risen by September, according to a Reuters poll of 17 economists. Only one economist in the survey is currently forecasting rates to remain on hold until 2016, according to the survey.

The Reserve Bank next reviews the official cash rate next Thursday.

"The bank will likely feel compelled to highlight that there are now two-sided risks to the inflation outlook," the BNZ's Martin said. "However, it will be wary of encouraging lower market expectations, which already price very little in the way of further rate hikes (only 50 basis points over the next two years). The implications of that, in terms of restoking areas such as the housing market, may be unwanted."

Today, the focus will be on New Zealand overseas merchandise trade data for September, scheduled for release at 10:45am. Imports of $4.2 billion probably outweighed exports of $3.5 billion, resulting in a $700 million monthly trade deficit, according to a Reuters poll of economists.

The data will probably show weaker prices for dairy exports and is unlikely to provide much to shore up the New Zealand dollar before the end of the week, said the BNZ's Martin. It has support at 77.80 US cents, she said.

Also out today, the Reserve Bank releases monthly data on low-equity mortgage lending at 3pm and Chinese property prices for September are published.

Tonight, all eyes will be on German consumer confidence, UK third quarter GDP and US new homes sales data.

The New Zealand dollar advanced to 84.58 yen from 84.28 yen yesterday as investors shed the safe-haven yen amid improved global growth sentiment following better-than-expected manufacturing data from China, Germany and the Eurozone

The New Zealand dollar declined to 89.27 Australian cents from 89.67 cents yesterday, weakened to 61.80 euro cents from 62.13 cents and slipped to 48.77 British pence from 48.92 pence.


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