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NZ dollar falls as weak inflation weighs on rate expectations; greenback still under pressure

Thursday 25th January 2018

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The New Zealand dollar fell as weaker-than-expected inflation figures dashed expectations the Reserve Bank might have raised interest this year, although the greenback remained out of favour over US Treasury Secretary Steven Mnuchin's jawboning. 

The kiwi traded at 73.82 US cents as at 5pm in Wellington, down from 74.28 US cents at 8am, although still up from 73.60 cents yesterday. The trade-weighted index dropped to 75.02 from 75.43 yesterday.

The local currency tumbled after government data showed the consumers price index rose at an annual pace of 1.6 percent in the December quarter, below the 1.9 percent pace predicted in a poll of 13 economists surveyed by Bloomberg and the Reserve Bank's projection for an annual rise of 1.8 percent. The data led several economists to push back their forecast for when the Reserve Bank might lift rates, including Bank of New Zealand senior economist Craig Ebert who now expects the first rate hike in February next year versus a prior call for August this year. 

Swap rates also pushed lower, reflecting expectations the central bank will remain on hold for longer. New Zealand's two-year swap rate fell five basis points to 2.17 percent while 10-year swaps fell two basis points to 3.23 percent.

Paul Dales, chief Australia and New Zealand economist for Capital Economics, said the kiwi could fall below 70 US cents based on his forecast that the benchmark rate won't rise until the second half of 2019.  

Still, the kiwi recovered some of its losses as the greenback remained under significant pressure in the Asia session after Mnuchin told a press briefing at the World Economic Forum in Davos that “obviously a weaker dollar is good for us as it relates to trade and opportunities". The comments were seen as a departure from the traditional stance on the greenback and underlined fears of greater economic protectionism by the US. 

Sheldon Slabbert, a trader at CMC Markets, said while the CPI was "surprisingly benign" the kiwi's direction will continue to be tied to the fate of the US dollar.

"It's really just a question of whether we see a continuation of the US dollar slide," he said. Given "we are in a dollar bearish environment" the kiwi is likely to continue to tick back up, he said.     

The kiwi remained under pressure against the Australian dollar, which traded near a four-month high against the greenback, falling to 91.18 Australian cents from 91.99 cents yesterday.

The local currency was at 4.6702 Chinese yuan from 4.7026 yuan. It slipped to 51.65 British pence from 52.43 pence yesterday and traded at 59.36 euro cents from 59.76 cents. The kiwi was at 80.48 yen from 80.92 yen yesterday.


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