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NZ dollar tanks after RBNZ slashes rates to fire economy

Wednesday 7th August 2019

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The New Zealand dollar tanked after the Reserve Bank surprised the market by cutting its official cash rate by 50 points rather than the 25 points most were expecting.

The kiwi was trading at 63.95 US cents at 5pm in Wellington, above the day’s low of 63.76 cents but down from 65.28 cents at 7:55am. The trade-weighted index sank to 71.23 points from 72.53.

The central bank's new monetary policy committee cited a softer outlook for employment and inflation, slower economic growth and weaker global conditions for its decision to cut the OCR to a record low at 1 percent from what previously was a record low at 1.5 percent.

“It was certainly interesting. He’s always had a penchant for being the white knight,” Tim Kelleher, head of foreign exchange sales at Commonwealth Bank of Australia, said referring to Reserve Bank governor Adrian Orr. Orr is one of seven MPC members.

“He certainly caught everybody on the hop because the jobs data yesterday was so good,” Kelleher says. The unemployment rate fell to an 11-year low at 3.9 percent in the June quarter.

Not only did the kiwi dollar tumble, it dragged down the Australian and Canadian dollars as well – the three currencies are often lumped together as all three countries’ economies rely heavily on commodity exports.

Kelleher says he doesn’t expect the domestic currency will fall much further because there is about $1 billion of foreign exchange options priced at 63 US cents due to expire in the next couple of days.

“If it does get down to that level, there should be plenty of demand, I would’ve thought.”

Other commentators echoed Kelleher’s surprise. ANZ Bank headlined its commentary succinctly as: ‘Smack’ while Infometrics talked about taking ‘a chainsaw to the economic outlook.’ Bank of New Zealand’s headline was: ‘RBNZ on full attack.’

“Boy, didn’t see that coming! In hindsight, probably should have!” writes BNZ head of research Stephen Toplis.

“Yet again, governor Orr (and his committee) has shown that they want to get ‘in front of the curve.’ Rather than cut 25 basis points, and indicate that another rate cut was likely, they decided to not pussyfoot around and, instead, throw everything at the market at once,” Toplis says.

“Thank goodness the employment data was so strong yesterday or goodness knows what they would have done!”

The New Zealand dollar was trading at 95.46 Australian cents from 96.55, at 52.53 British pence from 53.65, at 57.03 euro cents from 58.29, at 67.87 yen from 69.50 and at 4.5056 yuan from 4.5835.

The New Zealand two-year swap rate fell to a record low bid price of 0.9850 percent from 1.1694 yesterday. The 10-year swap rate also plumbed new record lows at 1.3380 percent from 1.4675.

(BusinessDesk)

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