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NZ dollar drops vs. Australian dollar on lack of RBA rate cut

Tuesday 7th June 2016

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The New Zealand dollar fell against the Australian dollar after the Reserve Bank of Australia kept its cash rate unchanged, disappointing traders who had bet on a more dovish central bank.

The kiwi dollar fell to 93.32 Australian cents as at 5pm in Wellington from 93.74 cents immediately before the RBA statement and from 94.38 cents late yesterday. The local dollar slipped to 69.25 US cents from as high as 69.67 US cents yesterday, having surged from 68.28 cents on Friday, after a weaker-than-expected US labour market report.

The RBA kept its cash rate unchanged at a record low 1.75 percent and governor Glenn Stevens said that having cut rates at its May meeting, the stance of policy was now about right to ensure sustainable economic growth and inflation returning to its target band over time. Traders are now looking ahead to the Reserve Bank of New Zealand's monetary policy report on Thursday amid expectations governor Graeme Wheeler will hold off cutting rates given the economy is growing at a respectable pace and the housing market doesn't need more stimulus.

"The market may have anticipated some form of stimulus in the shape of a rate cut (from the RBA) and we're probably seeing people have to reprice the Aussie dollar given the RBA was slightly more hawkish," said Sheldon Slabbert, sales trader at CMC Markets. In New Zealand, "my expectation is for us to be on hold on Thursday".

While whole milk powder prices were weaker in the latest dairy auction, "the housing market doesn't need more stimulus and overall business conditions aren't too bad," Slabbert said. There's a growing sense that "cutting interest rates is not necessarily a magic bullet."

The kiwi dollar surged against a weaker US dollar on Friday after US labour market data showed employers in the world's largest economy added just 38,000 workers in May, the lowest level since September 2010 and below the 164,000 expected by economists in a Reuters survey. That's prompted traders to scale back their bets for imminent US interest rate hikes. Federal Reserve chair Janet Yellen acknowledged in a speech Monday that the jobs report was "disappointing", however, she said, "further gradual increases in the federal funds rate are likely to be appropriate". Yellen didn't give a timeframe for hikes, in contrast to her speech last month when she noted hikes would probably be appropriate "in coming months".

"There was a lot of hawkish rhetoric from the Fed. Friday's job number obviously blew that out of the water and has taken a June cut, which was a stretch anyway, off the table," Slabbert said. Traders still expect a rate cut in Australia, but now the looming elections across the Tasman mean any move by the RBA is likely to be further off.

The New Zealand dollar gained to 47.65 British pence from 47.39 pence on Friday after latest polling results showed support for Britain leaving the European Union, ahead of a June 23 referendum. The kiwi increased to 74.53 yen from 74.17 yen and rose to 4.5443 yuan from 4.4951 yuan. It was little changed at 61.16 euro cents from 61.19 cents.

The two-year swap rate rose about 3 basis points to 2.22 percent and the 10-year swaps rose 3 points to 2.82 percent.

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