NZ dollar sinks after RBNZ's Wheeler cuts OCR in effort to head off subdued inflation view

Thursday 10th March 2016

The New Zealand dollar dropped to a week-low against the greenback and a five-and-a-half month low against the Aussie after Reserve Bank governor Graeme Wheeler surprised investors with an early interest rate cut in an effort to head off dwindling inflation expectations.

The kiwi fell to 66.30 US cents at 5pm in Wellington from 67.78 cents immediately before the release and 67.26 cents yesterday. It sank to 88.60 Australian cents from 90.14 cents at 9am and 90.59 cents yesterday.

RBNZ's Wheeler cut the official cash rate a quarter point to a record-low 2.25 percent, and lowered the track of the 90-day bank bill rate by half a percentage point, indicating another reduction was likely. He later told politicians he may need to go further if the data requires it. Wheeler cut the key rate to prevent cheap oil weighing on headline inflation from influencing firms' price and wage setting behaviour.

"Currencies had a big reaction today because no-one was prepared for it to happen today and it took them by surprise," said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland. "It fits with our view of the kiwi falling into the low 60s in the second half of the year - this helps, but doesn't do the whole job, which needs the US dollar to play ball."

New Zealand's two-year swap rate fell 19 basis points to 2.24 percent and 10-year swaps dropped 13 basis points to 2.94 percent.

The kiwi declined to 799.21 Korean won from 817.44 won yesterday after the Bank of Korea held its base rate at 1.5 percent, and sank to 88.01 Canadian cents from 90.39 cents after the Bank of Canada kept its key rate at 0.5 percent.

Traders will be watching the European Central Bank meeting on Thursday in Brussels, with the monetary authority expected to inject more stimulus into the regional economy. The kiwi fell to 60.40 euro cents from 61.29 cents yesterday, and decreased to 46.68 British pence from 47.44 pence.

It sank to 4.3198 Chinese yuan from 4.3811 yuan yesterday after government data showed China's pace of inflation increased at its fastest clip since mid-2014 in February as seasonal distortions pushed up food prices. The kiwi slipped to 75.38 yen from 75.77 yen yesterday.

The trade-weighted index dropped to 71.23 from 72.43 yesterday.

BusinessDesk.co.nz

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