NZ dollar trades below key support level as market digests dovish RBNZ statement

The New Zealand dollar is heading for a 0.5 percent weekly decline, having tumbled yesterday after a 'dovish' Reserve Bank statement and traders said the kiwi could extend its decline if it ends the week below a key support level.

The kiwi traded at 68.41 US cents as at 5pm in Wellington from 68.34 cents late yesterday and down from 68.59 cents a week ago. The trade-weighted index was at 74.70 from 74.74 yesterday, below the RBNZ's latest projected average for the TWI in the June quarter of 76. 

The kiwi has failed to sustainably push below 68.50 US cents in the past few weeks but is trading near its lowest levels in almost 12 months. If it ends the week below that level, it could head down to 67 US cents, traders said today, and if it closes above, it will have kept broadly within its recent trading range. Reserve Bank governor Graeme Wheeler surprised the market yesterday by keeping the track for the official cash rate unchanged instead of bringing forward the timing of a rate hike.

"That was a very dovish statement so the market had to take notice of it," said Alex Hill, head of dealing Australasia at HiFX. "But the market will really make its mind up with the next set of inflationary economic data."

The central bank "poured water" on the idea that interest rates are set to rise but the kiwi "hasn't fallen down the elevator shaft" as a result, Hill said. "The big picture hasn't changed a lot".

Wheeler yesterday kept the official cash rate at 1.75 percent and kept the projected track unchanged from its February statement, surprising some in the market who had been expecting the bank to adopt a mild tightening bias after a spike in oil and food prices pushed inflation above forecast in the first three months of the year. Wheeler defended the neutral stance, saying the bank hasn't seen significant wage pressures and that growth was slower than expected through the latter half of last year, meaning there were fewer capacity constraints than anticipated. 

"Right now, it seems quite clear that the RBNZ has far more confidence to deal with an inflation overshoot than the opposite, especially at a time when policy is already being tightened through the banking sector," ANZ Bank New Zealand economist Phil Borkin said in a note. "In thinking about the near-term NZD outlook, the RBNZ’s stance is clearly something that could act as a topside cap (even though its own explicit view on the NZD has turned far more relaxed)."

The kiwi didn't move much after figures showed manufacturing activity dipped in April or when Real Estate Insitute data showed a drop in the national median house price and fewer property sales. 

The kiwi rose to 53.06 British pence from 52.81 pence yesterday. The local currency traded at 62.93 euro cents from 62.86 cents yesterday and fell to 77.75 yen from 78.02 yen. It fell to 92.65 Australian cents from 93.02 cents and increased to 4.7203 Chinese yuan from 4.7167 yuan. 

Two-year swap rates fell 5 basis points to 2.21 percent and 10-year swaps declined 7 basis points to 3.31 percent. 

(BusinessDesk)