NZ dollar heads for 1.7% fall on prospect of further rate cuts

Friday 11th March 2016

The New Zealand dollar is heading for a 1.7 percent drop against the greenback after Reserve Bank governor Graeme Wheeler surprised markets yesterday with an early interest rate cut and indicated more were to come.

The kiwi fell to 66.93 US cents at 5pm in Wellington from 68.12 cents on Friday in New York last week. It traded at 66.76 cents at 8am and 66.32 cents yesterday. The trade-weighted index was at 71.59 from 71.27 yesterday, and is heading for a 1.7 percent decline on the week.

A BusinessDesk survey of nine analysts predicted the local currency would trade between 65.50 US cents and 69.50 cents this week, with five expecting the kiwi to gain, two betting it would decline, and two anticipating it would stay largely unchanged.

Wheeler surprised investors yesterday when he lower the official cash rate a quarter point to a record-low 2.25 percent and reduced the forecast track for the 90-day bank bill rate, implying another cut was to come. Traders had priced in an outside chance of a reduction, and most economists weren't expecting the Reserve Bank to move so early after Wheeler's earlier reluctance to cut the rate as globally cheap oil sapped the headline inflation figure.

"The market's repricing where the RBNZ could go from here," said Philip Borkin, senior economist at ANZ Bank New Zealand in Auckland. "There's a pretty strong signal that's putting pressure on the New Zealand dollar."

After a slump in the kiwi dollar yesterday, Borkin said it wasn't surprising to see it retrace some of that fall in today's trading session.

Fears about the Chinese economy and weak commodity prices have fuelled volatility in financial markets this year and prompted some investors to question whether the US Federal Reserve will deliver the projected interest rate hikes as planned.

ANZ's Borkin said "the market is under-appreciating the desire of the Fed to get rates higher" and expects another two increases this year. That would stoke demand for the greenback and push the kiwi down against the US dollar.

Government data today showed New Zealand's food prices fell in February, led lower by cheaper fruit and vegetables, while Real Estate Institute figures showed Auckland's cooling property market was stoking demand elsewhere in the country.

New Zealand's two-year swap rates increased two basis points to 2.26 percent, and 10-year swaps rose nine basis points to 3.03 percent.

The kiwi fell to 59.90 euro cents from 60.43 cents yesterday after the European Central Bank signalled an end to interest rate cuts after delivering more stimulus for the regional economy.

The local currency increased to 4.3432 Chinese yuan from 4.3211 yuan yesterday after the People's Bank of China raised its daily reference rate on the yuan by the most since November.

The kiwi advanced to 75.91 yen from 75.43 yen yesterday and climbed to 89.35 Australian cents from 88.66 cents. It edged up to 46.87 British pence from 46.71 pence.

BusinessDesk.co.nz

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