NZ dollar heads for 1.2% weekly decline as rate cuts considered

Friday 22nd May 2015

The New Zealand dollar is heading for a 1.2 percent weekly decline this week as investors weigh up whether measures to reign in the country's housing market will free up the Reserve Bank to cut interest rates.

The kiwi fell to 73.82 US cents at 5pm in Wellington from 74.72 cents on Friday in New York last week. It traded at 73.28 cents at 8am and 73.34 cents yesterday. The trade-weighted index rose to 76.30 from 75.94 yesterday, and is heading for a 0.4 percent weekly decline.

A BusinessDesk survey of 12 advisers on Monday predicted the kiwi would trade between 72.75 US cents and 76.70 cents this week. Seven said it would drop, one predicted it would rise, while four expected it to stay largely unchanged.

Traders are pricing in a 45 percent chance the Reserve Bank will cut the 3.5 percent official cash rate by a quarter-point when it reviews monetary policy next month, according to the Overnight Index Swap curve. Efforts to cool Auckland's housing market through loan restrictions on property investors and steps to tax capital gains on speculation more thoroughly are seen as giving governor Graeme Wheeler greater scope to provide more stimulus to the economy, which is showing signs of slowing down, and drag up persistently low inflation.

At the same time, investors have been trying to gauge the strength of the US economy after a weak first quarter, and what bearing that will have on the Federal Reserve's decision to starting raising interest rates. The Fed has been running extraordinarily loose policy with the fed funds rate at zero-to-0.25 percent since the global financial crisis, and has been making noises about moving to a more normal setting since it wrapped up a money printing programme last year.

"Expectations around a rate cut in New Zealand in June/July has slipped away, and the market seems to be split more 50/50 on a June rate cut," said Martin Rudings, senior dealer foreign exchange at OMF in Wellington. "Today there was a noticeable buyer in the market and the sales looked like they were out of New Zealand."

New Zealand's two-year swap rate increased to 3.37 percent at 5pm in Wellington from 3.36 percent yesterday, and the 10-year swap rate advanced to 3.98 percent from 3.97 percent.

Rudings said moves by the Chinese government to fund Brazilian infrastructure and give it a new iron ore supplier weighed on the Australian dollar, and drove up the kiwi dollar against its trans-Tasman counterpart.

The kiwi rose to 93.20 Australian cents at 5pm in Wellington from 92.73 cents yesterday. It gained to 4.5737 Chinese yuan from 4.5483 yuan.

The local currency was little changed at 47.12 British pence from 47.14 pence yesterday having touched a four-year low against the sterling after UK retail sales data beat expectations. It rose to 89.20 yen from 88.79 yen yesterday after the Bank of Japan maintained its quantitative easing programme, and said it was more optimistic about the strength of the world's third-biggest economy.

The kiwi advanced to 66.27 euro cents from 65.92 cents yesterday.

BusinessDesk.co.nz

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