NZ dollar extends decline as RBNZ documents fuel rate-cut talk, greenback in ascendancy

Tuesday 23rd June 2015

The New Zealand dollar extended its decline in local trading as investors continue to rally behind the greenback, and as Reserve Bank documents show the central bank has been overestimating inflation for the past five years.

The kiwi fell to a five-year low 68.47 US cents at 5pm in Wellington from 68.63 cents at 8am and 69.14 cents yesterday. The trade-weighted index dropped to 71.46 from 71.79 yesterday.

The greenback has been rallying as upbeat data in the world's biggest economy stokes expectations the Federal Reserve will start raising interest rates this year. Meantime, New Zealand Reserve Bank documents showed the central bank had a persistent bias in its inflation forecasts, meaning it overestimated the pace of increasing consumer prices since 2010, according to a Bloomberg News report. Last week, Finance Minister Bill English said inflation had been tracking below the 2 percent mid-point target for several years and that the Reserve Bank needed to get back on target.

"When you look at the comments, it's obviously something they're discussions with the government about," said Mark Johnson, senior dealer foreign exchange at OMF in Wellington. "The upshot is it's keeping a lid on the kiwi."

Traders are pricing in 50 basis points of cuts to the 3.25 percent official cash rate over the coming 12 months, after the Reserve Bank this month embarked on a tightening cycle.

OMF's Johnson said the kiwi has dropped for 10 consecutive weeks and is due a brief rally, though the risk of buying on dips is that the currency continues to decline.

New Zealand's two-year swap rate rose to 3.08 percent at 5pm in Wellington from 3.05 percent yesterday, and the 10-year swap rate gained to 3.95 percent from 3.88 percent.

The local currency sank to 4.2503 Chinese yuan from 4.2938 yuan after the HSBC flash purchasing managers' index showed manufacturing continued to contract in June.

The kiwi was little changed at 60.75 euro cents from 60.66 cents yesterday on optimism Greek reform proposals may help the country clinch a deal with its creditors and avoid a debt default.

The local currency traded at 88.88 Australian cents at 5pm in Wellington from 88.83 cents yesterday, and was little changed at 43.41 British pence from 43.47 pence. It decreased to 84.74 yen from 84.83 yen yesterday.

BusinessDesk.co.nz

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