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NZ dollar falls as weak Australian CPI rekindles rate cut speculation

Wednesday 24th April 2019

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The New Zealand dollar was dragged lower along with its trans-Tasman counterpart after March quarter inflation in Australia fell to its slowest pace in three years.

The kiwi was trading at 66.20 US cents at 5pm in Wellington from 66.49 at 7:45am but climbed to 94.10 Australian cents from 93.69. The trade-weighted index eased to 72.17 points from 72.34.

Australia’s headline inflation rate came in flat for the March quarter against expectations of a 0.2 percent increase, according to a Bloomberg survey. The annual rate of 1.3 percent was the weakest since the third quarter of 2016.

“It came in at something of a miss pretty much on every count,” says Mike Shirley, a dealer at Kiwibank. The underlying annual rate of 1.42 percent was the equal-lowest rate on record.

The data saw the Australian dollar plummet and “the New Zealand dollar essentially got taken along for the ride, really guilty by association,” Shirley says.

Financial markets moved from pricing in about a 20 percent chance of the Reserve Bank of Australia cutting interest rates in May to about a 60 percent chance following the data.

A similar miss in New Zealand inflation data released earlier this month had meant the market was already pricing in about a 50 percent chance the Reserve Bank of New Zealand will cut rates in May. That moved out to a 66 percent chance after the Australian data.

“May looks to be a very exciting month in terms of potential central bank action,” Shirley says.

Reflecting the change in pricing, the New Zealand two-year swap rate fell to 1.6002 percent from 1.6439 yesterday; the 10-year swap rate sank to 2.1775 percent from 2.2300.

Shirley says the data puts the RBA in somewhat of a dilemma because Australia’s employment market remains strong with a 5 percent unemployment rate. That suggests a rate cut isn’t necessary but the inflation rate is well below the RBA’s 2-3 percent medium-term target.

The New Zealand dollar was trading at 51.17 British pence from 51.39, at 59.02 euro cents from 59.24, at 74.02 Japanese yen from 74.36 and at 4.4505 Chinese yuan from 4.4714.


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