NZ dollar drops as inflation expectations fall stirs rate cut speculation

Tuesday 16th February 2016

The New Zealand dollar fell as firms' inflation expectations fell to the lowest level in more than two decades, stoking speculation the Reserve Bank may have to cut interest rates.

The kiwi dropped to 66.03 US cents from 66.63 cents immediately before the release of the central bank's quarterly survey of expectations, and down from 66.55 cents yesterday. The trade-weighted index decreased to 71.68 from 72.15.

The Reserve Bank's survey of expectations showed respondents see annual inflation one year out at 1.09 percent, down from the 1.51 percent rate seen in the last survey three months ago, and the lowest level since 1994. New Zealand's annual pace of inflation is currently at 0.1 percent, and has been below the central bank's target band of 1-to-3 percent for more than a year, fuelling expectations governor Graeme Wheeler will have to lower the 2.5 percent official cash rate. Wheeler so far has resisted those calls, saying he can look through shocks such as the slump in oil prices, but has left the door open for more cuts.

"Central banks get quite uncomfortable when expectations fall or stay low," said Matt Blackwell, a director at OMF in Auckland. "I would expect we will trade below 66 US cents overnight."

The lower inflation expectations saw a steepening of the interest rate curve, with the two-year swap rate falling three basis points to 2.53 percent, and 10-year swaps rising three basis points to 3.2 percent.

A number of central banks have shifted to negative benchmark interest rates as they try to protect their nations from a slowing global economy in the face of rising financial market turbulence, slumping commodity prices, and a weaker Chinese economy.

The kiwi slipped to 802.73 Korean won from 804.86 won yesterday after the Bank of Korea kept its seven-day repurchase rate at a record low of 1.5 percent for an eighth month.

Traders will be watching tonight's GlobalDairyTrade auction for a gauge on how New Zealand's biggest export sector is tracking. OMF expects prices will fall 7 percent at the GDT auction, which will add pressure to the kiwi dollar, Blackwell said.

Government data today showed the volume of retail sales rose 1.2 percent in the final three months of the year, missing economists' expectations, while Finance Minister Bill English said the government has flexibility over the timing of $3.5 billion of spending increases over the coming two years.

The local currency edged down to 59.20 euro cents from 59.32 cents yesterday after European Central Bank president Mario Draghi said the monetary authority may inject more stimulus on fears of the impact of financial market volatility and a slowing global economy on the euro-zone. The kiwi was little changed at 45.75 British pence from 45.82 pence yesterday.

The New Zealand dollar fell to 4.3005 Chinese yuan from 4.3263 yuan yesterday and sank to 92.16 Australian cents from 92.95 cents yesterday. It was almost unchanged at 75.82 yen from 75.81 yen.

BusinessDesk.co.nz

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