NZ dollar falls as weak inflation data adds to case for rate cut in August

Monday 18th July 2016

The New Zealand dollar fell after figures showed inflation was weaker than expected in the second quarter adding to the case for a central bank rate cut at its Aug. 11 monetary policy review.

The kiwi traded at 70.93 US cents as at 5pm in Wellington, from 71.48 cents immediately before the inflation data was released and from 71.09 cents at the New York close on Friday. The trade-weighted index fell to 75.74 from 76.13.

Both quarterly and annual inflation were 0.4 percent, lagging behind the Reserve Bank's 0.6 percent forecast. Tradables inflation fell 1.5 percent from a year earlier reflecting a currency that's 5.5 percent stronger than the average the central bank has projected for the third quarter. Non-tradables inflation, which reflects the domestic economy, rose 1.8 percent, mainly on strength in the housing market, which the bank is anxious to avoid inflaming further.

"CPI yet again came in under expectations – for the RBNZ, the market and us," said Stephen Toplis, head of research at Bank of New Zealand. "At the margin, this will cause the RBNZ more angst and threaten to push inflation expectations ever lower. It was no surprise, then, that the market took today’s outturn as a further excuse to re-rate its pricing toward further easing."

Bets for a cut to the official cash rate, now at 2.25 percent, rose to 80 percent after the consumer price index data was released. The two-year swap rate fell to 2.115 percent from 2.165 percent before the inflation data and down from 2.18 percent on Friday. The 10-year swap rate fell about 3 basis points to 2.55 percent.

The kiwi didn't move much after a report showed the BNZ-BusinessNZ performance of services index fell 0.2 of an index point to a seasonally adjusted 56.7 last month, with all five sub-indices holding above a reading of 50 which separates contraction from expansion.

The US dollar index, a measure of the greenback against a basket of currencies, rose after US retail sales and industrial production figures beat expectations, raising estimates for economic growth. Still, the US Federal Reserve isn't expected to resume hiking interest rates in the short-term as it weighs up the impact of the UK's vote to quit the European Union on the global financial system. The failed coup in Turkey also underpinned support for the greenback as investors sought the relative safety of the world's reserve currency.

The kiwi rose to 74.80 yen from 74.52 yen on Friday in New York and fell to 4.7488 Chinese yuan from 4.7534 yuan. It fell to 93.35 Australian cents from 93.80 cents last week and dropped to 64.08 euro cents from 64.40 cents. The local currency slipped to 53.57 British pence from 53.88 pence last week.

BusinessDesk.co.nz

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