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NZ dollar drops after RBNZ adopts easing bias, Fonterra cuts forecast payout

Thursday 28th January 2016

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The New Zealand dollar fell as the Reserve Bank adopted a bias towards lower interest rates with cheap fuel keeping a lid on inflation and Fonterra Cooperative Group reducing its forecast payout to farmers on dismal dairy prices. 

The kiwi dropped to 64.44 US cents at 5pm in Wellington from 65.18 cents at 8am and 64.77 cents yesterday. The trade-weighted index declined to 70.91 from 71.29 yesterday. 

Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.5 percent, while saying further reductions may be needed with inflation set to take longer to return to the bank's target range of 1-to-3 percent. That reversed his decision last month to drop the easing bias when he insisted falling oil prices would pass through the official statistics and help inflation climb above 1 percent in the March quarter. Before the OCR review, Fonterra cut its forecast payout by 45 cents to $4.15 per kilogram of milk solids as global oversupply continues to depress dairy prices. 

"The RBNZ stands ready to cut further and made that very clear, which is a bit of a change to the 'on-the-fence' statement in December," said Stuart Ive, senior dealer foreign exchange at OMF in Wellington. "The kiwi got sold off very rapidly and most of the day has been consolidating on that move - overnight I expect to see further pressure on the kiwi, especially on the crosses." 

New Zealand's two-year swap rate fell two basis points to 2.62 percent at 5pm in Wellington, and 10-year swaps were down the same amount to 3.4 percent. 

Earlier in the day the Federal Reserve kept policy unchanged in its first meeting of the year, while saying it was "closely monitoring" global economic and financial market developments. Last month the Fed started raising interest rates from the near-zero policy in place since the global financial crisis, and has previously indicated it will continue to gradually raise rates this year. 

The kiwi fell to 4.2372 Chinese yuan from 4.2615 yuan today as Chinese stocks fell for another day, with the Shanghai Composite index down 0.5 percent in afternoon trading, and taking its drop so far this month to 23 percent. 

The local currency was little changed at 76.47 yen from 76.49 yen yesterday, and declined to 59.13 euro cents from 59.59 cents. It dropped to 45.22 British pence from 45.68 pence.

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