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NZ dollar drops to six year low as dairy price slump, tepid CPI feeds prospect for aggressive rate cuts

Thursday 16th July 2015

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The New Zealand dollar dropped to a six year low after a surprisingly sharp slump in dairy prices fuelled concerns about the impact to the broader economy, raising expectations the Reserve Bank will cut interest rates more aggressively with benign inflation providing plenty of scope for looser policy.

The kiwi fell as low as 65.08 US cents, the lowest since July 2009, and was trading at 65.20 cents at 5pm in Wellington from 65.92 cents at 8am and 67.05 cents yesterday. The trade weighted index dropped to 69.26 from 70.88 yesterday, the first time the TWI has been below 70 since June 2012.

Prices at the GlobalDairyTrade auction also dropped to a six year low as a global oversupply and waning demand continued to keep pressure on the commodity. That sparked fears about impact on New Zealand's wider economy, and government data today showing annual inflation of 0.3 percent in the June quarter was seen as giving the central bank room to cut the official cash rate more aggressively than previously signalled. Westpac Banking Corp economists sliced 50 basis points from their forecast for the OCR, predicting the benchmark rate will be at 2 percent by the end of the year, a new record low.

"Dairy had a big drop - bigger than anyone would have forecast and even more than the futures market was pricing," said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland. "We think there's going to be a 50 point cut in either July or September, taking us to a record low OCR to try and shore up confidence, and we're forecasting the kiwi will be to 62 (US cents) over the next couple of months."

Traders are pricing in 56 basis points of cuts over the coming 12 months, according to the Overnight Index Swap curve.

New Zealand's two year swap rate sank to 2.88 percent at 5pm in Wellington from 2.98 percent yesterday, and the 10 year swap rate dropped to 3.76 percent from 3.88 percent.

A manufacturing survey today showed New Zealand's industrial production activity picked up last month as a weaker currency was seen as a positive for exporters who derive their income overseas, while a consumer confidence survey showed local households were more dour about the economic outlook.

The local currency fell to 59.62 euro cents from 60.94 cents yesterday after Greek legislators passed law enabling austerity measures demanded by the Mediterranean nation's creditors.

The kiwi declined to 41.70 British pence from 42.85 pence yesterday, and dropped to 80.67 yen from 82.74 yen. The local currency fell to 88.50 Australian cents from 89.72 cents yesterday, and sank to 4.0466 Chinese yuan from 4.1616 yuan.

 

 

 

 

BusinessDesk.co.nz



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