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Kiwi resumes fall as implications of quake assessed

Wednesday 23rd February 2011

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The New Zealand dollar recovered from a drop overnight but came under renewed pressure as investors continued to assess the implications of the magnitude 6.3 earthquake in Christchurch on Tuesday.

The debate about the financial implications hotted up as Westpac made a bold prediction that the Reserve Bank of New Zealand (RBNZ) will slash the official cash rate by 50 basis points on March 10 because of the earthquake. The central bank has previously been expected to raise rates later this year.

Also, JP Morgan estimated insured losses could be US$12 billion (NZ$16 billion), Reuters reported, citing sources.

The NZ dollar was at US74.86c at 5pm, compared to US74.89c at 8am and US75.06c at 5pm yesterday.

It fell to around US74.50c on Tuesday night from around US76.30c when the quake hit just before 1pm yesterday.

Imre Speizer, senior currency strategist at Westpac, said his bank had changed its forecast to a 50 basis point cut in the official cash rate to 2.5% in March. It did not expect a policy tightening to resume until the first quarter of 2012, when it previously expected a resumption in the third quarter of this year.

Lower interest rates make the NZ dollar a less attractive investment.

A statement from the RBNZ today dealt with banking system issues and did not address monetary policy as an issue.

"The best we can do is to put ourselves in the governor's shoes, given what we know about the RBNZ's decision-making process and the information we have so far about the scale of this disaster," Westpac said.

"Our judgement is that if the RBNZ does decide to cut, it will be no later than the March 10 monetary policy statement. An earlier, unscheduled rate review can't be ruled out, but the monetary policy statement is only two weeks away and will need to be large enough to be meaningful, that is more than 25 basis points," Westpac said.

Moody's Investors Services said today that it was not changing the country's credit rating but it would be watching the implications of the earthquake for the Government's accounts in the May budget.

The NZ dollar to a two-month low against the Australian dollar around A74.45c overnight and was A74.67c at 5pm. It has dropped from about A75.70c before the quake.

Against the European currency, the NZ dollar dropped to its lowest level in nearly four months below 0.5480 euro early today, from 0.5580 before the earthquake and it was 0.5465 at 5pm.

The trade weighted index was down to 66.57 at 5pm from 66.98 at the same time yesterday.



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