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NZ dollar falls as traders mull prospects of deeper OCR cut, 2-year swaps fall below 2%

Thursday 4th August 2016

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The New Zealand dollar fell and the two-year swap rate dropped below 2 percent for the first time as traders pondered the prospects of a deeper cut to the official cash rate next week.

The kiwi dollar traded at 71.69 US cents as at 5pm in Wellington, having earlier sunk as low as 71.35 cents, from 72 cents late yesterday. The trade-weighted index was at 76.05, having touched 75.82 earlier, from 76.46 yesterday.

The two-year swap rate has fallen some 80 basis points this year and briefly fell below 2 percent earlier in the day on speculation the Reserve Bank is sufficiently concerned about weak inflation and a strong currency to contemplate a cut of 50 basis points on Aug. 11, pushing the OCR to within a quarter-point of the Reserve Bank of Australia's 1.5 percent cash rate. Ahead of the RBNZ's policy statement, the Bank of England reviews policy overnight and could cut its bank rate from 0.5 percent, while on Friday in the US, official payrolls data is expected to show the world's biggest economy added 180,000 jobs last month and a stronger number could reignite speculation for a Federal Reserve rate hike this year.

"There's obviously some key event risk coming up," said Philip Borkin, senior economist at ANZ New Zealand. "Payrolls is clearly key for the NZ dollar's direction. If there's a decent number then there's a chance the Fed comes to the table this year."

Borkin said next week's monetary policy statement is expected to be "relatively dovish" but ANZ doesn't expect 50 basis points of cuts because the only other times the RBNZ has cut that much has been after emergency-type events such as the February 2011 earthquake in Christchurch and a massive period of easing between September 2008 and April 2009, in the depths of the global financial crisis, when the central bank slashed the OCR by 5.5 percentage points. 

"This time around the domestic economy is doing pretty well. it doesn't feel like they need to get the cash rate down in such a hurry," Borkin said, adding that ANZ is predicting a quarter-point cut next week and a second cut in early 2017.  He expects governor Graeme Wheeler to harden his language about the New Zealand dollar being too high but stop short of using words such as "unjustified" or "unsustainable" which would signal intervention was a possibility. Intervention was unlikely to be contemplated at present because it was unlikely to be a success, he said.

Traders are putting 96 percent odds on RBNZ governor Graeme Wheeler cutting the official cash rate next week after its latest survey showed expectations for low inflation are becoming entrenched. A decline in the price of crude oil in recent months, even though it gained overnight, means fuel prices will again be among deflationary forces in the local economy, while a trade-weighted index is still well above the central bank's assumed path, meaning there's little inflation in imported prices.

The kiwi fell to 94.18 Australian cents from 94.80 cents late yesterday. It was little changed at 72.63 yen from 73.58 yen yesterday and was at 64.28 euro cents from 64.25 cents. It fell to 53.77 British pence ahead of the Bank of England's policy review tonight, amid expectations of a rate cut and further stimulus measures, from 54.44 pence. It fell to 4.7564 Chinese yuan from 4.7893 yuan yesterday. 

New Zealand's two-year swap rate ended the day little changed at about 2 percent and the 10-year swaps fell 1 basis point to 2.45 percent.

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