NZ dollar tumbles as RBNZ delivers rate cut, promises more

Thursday 10th September 2015

The New Zealand dollar tumbled more than 1 US cent and fell on a trade-weighted basis after the Reserve Bank cut interest rates and flagged a further decline, while signalling risks to the economy including the El Nino weather pattern and a potential marked slowdown in China.

The kiwi dollar fell to 62.62 US cents as at 5pm in Wellington, from 63.85 cents immediately before the Reserve Bank's monetary policy statement and down from 63.72 cents late yesterday. the trade-weighted index fell to 68.37 from 69.30.

Governor Graeme Wheeler delivered a statement that was broadly in line with expectations of a quarter point cut to the OCR to 2.75 percent and, based on the projected track for 90-day bank bills, has a further 25 basis point cut up his sleeve. But the market reacted harshly after the kiwi was driven up ahead of today's statement along with other commodity currencies, copper, and equity markets amid a broad appetite for risk.

In the briefing that followed the release of the MPS, Wheeler cited among main downside risks the potential for the El Nino weather pattern to hurt farm output over the summer and either for the Chinese economy to slow more than expected or for there to be a sharp devaluation of the yuan.

"The New Zealand dollar was doing very well over the preceding 24 hour period, and traders were reacting to much better pricing action," said Robert Rennie, chief currency strategist at Westpac Banking Corp. "The message we got from the RBNZ was 25 basis points and a bill track that suggested the OCR would fall to 2.5 percent. And then there was commentary that if China and El Nino further dent growth, we could see the policy rate get a great deal lower than that."

The biggest adjustment to the central banks projections was for the exchange rate. It sees the TWI averaging 67.9 in the fourth quarter, down from its June forecast of 73.6, and sinking to an average 64.8 in the June quarter 2017. Wheeler softened his language on the currency, saying today that “further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices.”

Yet the central bank projected a resurgence of inflation in 2016, led by tradables inflation, as the fall in petrol and oil prices in early 2015 drop out of the annual inflation measure, and the weaker kiwi dollar lifts the New Zealand dollar price of imports. Tradables deflation of 2 percent in the June quarter this year turns to inflation of 2.4 percent in the same period of 2016, adding 1.9 percentage points to annual inflation.

The New Zealand dollar dropped to 89.49 Australian cents from 90.38 cents yesterday and fell to 3.9986 yuan from 4.0609 yuan. The local currency dropped to 75.54 yen from 76.60 yen yesterday, and fell to 40.79 British pence from 41.41 pence. It was down at 55.86 euro cents from 57.06 cents.

The two-year swap rate climbed about 3 basis points to 2.73 percent and 10-year swaps rose about 3 basis points to 3.58 percent.

BusinessDesk.co.nz

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