NZ dollar, swaps fall as RBNZ opens door to lower rates, Fonterra cuts forecast

Thursday 28th January 2016

The New Zealand dollar and swap rates fell after a one-two hit from Fonterra Cooperative Group lowering its forecast payout and the Reserve Bank opening the door to further interest rate cuts this year.

The kiwi fell to 64.29 US cents from 64.71 cents immediately before the RBNZ's announcement, which came half an hour after Fonterra's downgrade.

RBNZ governor Graeme Wheeler kept the official cash rate at 2.5 percent, while saying headline inflation will take longer to get back into the central bank's target band of between 1 percent and 3 percent than previously thought, and that further cuts may be needed. He'd shut the door on further easing last month, however government data last week showed the consumers price index rose just 0.1 percent in 2015, extending its run below the target band to five quarters.

"It's clearly a shift in the direction to cutting this year, the question now is when," said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland. "We still think, officially, in June, but there's a stronger case now for March."

Prior to the RBNZ statement, Fonterra cut its forecast farmgate milk payout by 45 cents to $4.15 per kilogram of milk solids, following rival processors Open Country Dairy and Westland Milk Products in signalling lower returns.

Westpac's Speizer said the currency didn't immediately react to the Fonterra announcement as traders delayed their response until after the OCR statement. That also pushed swap rates lower with the two-year swaps down 6.5 basis points to 2.575 percent, and 10-year swaps falling six basis points to 3.36 percent, the lowest level in at least 20 years, according to Reuters data.

Westpac has been more aggressive in its expectations that inflation would force the Reserve Bank to cut rates again, and other economists were more circumspect about today's announcement.

Wheeler said he will continue to watch the emerging economic data closely, and while the consumers price index will take longer to get back within target, the bank's core inflation measure was tracking within the band at 1.6 percent.

Sam Tuck, senior foreign exchange strategist at ANZ Bank New Zealand in Auckland, said the Reserve Bank added an "explicit bias for some further easing" but that the data doesn't warrant a move yet.

"There's no question that they have discretion to look through periods of lower-than-target inflation if it's not expected to be persistent," Tuck said.

ANZ's Tuck said the central bank also upgraded its rhetoric in talking down the currency, in saying a weaker exchange rate is appropriate given the recent declines in export prices, though he anticipates global risk sentiment will continue to drive the kiwi in the short term.

BusinessDesk.co.nz

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