NZ dollar falls as weak dairy prices add to case for rate cut

Wednesday 17th February 2016

The New Zealand dollar fell as weaker dairy prices added to yesterday's subdued expectations for inflation in building a case for the Reserve Bank to cut the official cash rate.

The kiwi traded at 65.60 US cents at 5pm in Wellington from 65.57 cents at 8am, and down from 65.98 cents yesterday. The trade-weighted index dropped to 71.44 from 71.66.

New Zealand's currency fell to a two-week low after dairy prices fell for a fourth straight auction on the GlobalDairyTrade platform, putting pressure on Fonterra Cooperative Group's forecast payout to farmers. That added to dwindling demand for the kiwi after a Reserve Bank survey showed inflation expectations fell to a 22-year low. Traders have priced in a 42 percent chance of a rate cut at the March meeting, according to the Overnight Index Swap curve.

In RBNZ governor Graeme Wheeler's first speech of the year, "he did specifically say he doesn't want inflation expectations to decline - that was quite significant really that the survey fell so low," said Mark Johnson, senior dealer foreign exchange at OMF in Wellington. "65.60 is an area where there's initial support and that's just holding for the moment."

OMF's Johnson said if that level breaks, the kiwi could fall to 64.50 US cents.

New Zealand two-year swap rates fell two basis points to 2.51 percent at 5pm in Wellington and 10-year swaps slipped one basis point to 3.19 percent.

Traders will be watching US producer prices and housing starts in the New York session, though minutes to the Federal Reserve's last policy review are likely to be ignored due to chair Janet Yellen's recent testimony to policymakers superceding it.

The local currency fell to 4.2797 Chinese yuan from 4.2979 yuan yesterday and increased to 92.37 Australian cents from 92.07 cents. It declined to 58.80 euro cents from 59.16 cents yesterday and increased to 45.86 British pence from 45.71 pence ahead of UK unemployment data. The kiwi dropped to 74.62 yen from 75.78 yen yesterday.

BusinessDesk.co.nz

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