NZ dollar tumbles almost 2 US cts after RBNZ cuts rates and signals more to come

Thursday 11th June 2015

The New Zealand dollar dropped almost 2 US cents after the Reserve Bank cut interest rates today and signalled more may be needed to revive a near stagnant pace of inflation.

The kiwi tumbled to 70.19 US cents at 5pm in Wellington from 72.07 cents immediately before the RBNZ statement, and 71.53 cents yesterday. The trade-weighted index sank to 73.12 from 74.72.

RBNZ governor Graeme Wheeler cut the official cash rate a quarter point to 3.25 percent, surprising some investors who had expected the bank to wait for more data before embarking on an easing cycle. The bank lowered the track of the 90 day bank bill rate, often seen as a proxy for the OCR, by more than half a percentage point, seeing it fall to 3.3 percent in the December quarter of this year, and bottoming out at 3.1 percent in June 2016 where it stays over the bank's forecast horizon until June 2017. Traders are pricing in 23 basis points of cuts over the coming 12 months, according to the Overnight Index Swap curve.

"The market's pretty convinced there will be a second cut, it would be quite unusual for the Reserve Bank to stop at one," said Raiko Shareef, currency strategist at Bank of New Zealand in Wellington. "From our modelling, kiwi should be around 71 (US cents), even if you build in the prospect of three rate cuts in total in this easing cycle, so tonight it will be interesting to what the offshore markets do with it."

Shareef said the kiwi could recover some of its losses and consolidate above 71 US cents in the near-term as investors take profit on their short positions. BNZ sees the currency falling to 68 cents by the end of the year, having previously predicted it declining to 70 cents.

In deciding on future rate cuts, Wheeler told policymakers he would be monitoring wage pressures, inflation signals and expectations, economic growth, commodity prices and the exchange rate, which he singled out as key to stoking inflation.

The kiwi dropped to 778.30 South Korean won at 5pm in Wellington from 798.26 won yesterday after the Bank of Korea also cut the seven-day repurchase rate 25 basis points to a record-low 1.5 percent, warning that the threat of Middle East respiratory syndrome (MERS) poses a threat to consumer confidence.

New Zealand government data today showed guest nights fell in April, snapping two months of gains, while Real Estate Institute of New Zealand figures showed median house sale prices rose 7 percent and sales volumes were up 22 percent, driven largely by the ongoing shortage of available houses in Auckland.

The kiwi dropped to a seven-month low 90.33 Australian cents from 92.94 cents yesterday after stronger than expected employment data across the Tasman bolstered demand for the Australian dollar. The local currency fell to 86.51 yen at 5pm in Wellington from 87.97 yen yesterday, and declined to 4.3546 Chinese yuan from 4.4363 yuan.

It sank to 62.08 euro cents from 63.29 cents yesterday and decreased to 45.29 British pence from 46.38 pence.

New Zealand two-year swap rate fell to 3.23 percent at 5pm in Wellington from 3.33 percent yesterday, and the 10-year swap rate increased to 4.15 percent from 4.13 percent.

BusinessDesk.co.nz

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