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NZ dollar becalmed after RBNZ's shock stance change

Thursday 28th March 2019

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The New Zealand dollar is becalmed after yesterday's shock announcement from the Reserve Bank that the next move in its official cash rate is likely to be down.

Previously, the central bank had said the OCR would remain on hold through to well into 2020 and that the next move could be either up or down.

The kiwi was trading at 68.06 US cents at 5pm in Wellington from 68.04 at 8am after losing a cent yesterday. The trade-weighted index was at 73.85 points from 73.83.

ANZ Bank’s foreign exchange and interest rate strategist Sandeep Parekh says that before the central bank’s statement yesterday, the market saw little chance of an OCR cut in May and had priced in just over a 70 percent chance of a cut in November.

Now, the market is pricing in a 40 percent chance of an OCR cut in May and 100 percent of a cut by August. By November there’s a 50 percent chance of a second OCR cut.

“It’s hard for it – the currency – to push lower without a cut actually being delivered,” Parekh says.

Illustrating how much yields in wholesale interest rate markets have fallen, the two-year swap rate ended today’s session at 1.6125 percent after earlier falling as low as 1.5475 percent from 1.6039 yesterday. The 10-year swap rate ended at 2.0775 percent from today’s low of 2.02 and yesterday’s close at 2.0650.

A tender of $600 million of six-year government bonds with a coupon of 2.75 percent sold today at an average yield of 1.4456 percent.

Reserve Bank governor Adrian Orr specifically cited the upward pressure on the New Zealand dollar from other central bankers taking a more dovish stance as a reason to change his own position.

Parekh says the market will be watching further data closely and the currency is likely to fall further on any weakness.

ANZ Bank had been almost alone in predicting a rate cut this year ahead of the Reserve Bank’s statement and has now brought forward its timing to August from November.

Chief economist Sharon Zollner says that “May versus August for the first cut is a line-ball call, given the definitiveness of the RBNZ’s change of stance yesterday.”

Zollner had based her call for a rate cut this year on the slowing economy and emerging global risks and says none of that has changed.

“Greater downside risks leading to an acknowledgement of a greater chance of an OCR cut is one thing, but actually cutting the OCR is another.”

Factors including rising dairy prices, disappointing but still “borderline respectable”  GDP growth, the tight labour market and upward price pressure on businesses, are all reasons the Reserve Bank may delay an OCR cut until August, Zollner says.

The New Zealand dollar was at 95.94 Australian cents from 96.01, at 51.60 British pence from 51.34, at 60.46 euro cents from 60.40, at 74.98 Japanese yen from 75.13 and at 4.5795 Chinese yuan from 4.5779.


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