NZ dollar drops to 4-year low, swap rates fall after central bank shifts into neutral

Thursday 29th January 2015

The New Zealand dollar tumbled to its lowest in almost four years and swap rates fell after the Reserve Bank dropped its tightening bias, saying it could raise or cut interest rates depending on the flow of economic data.

The kiwi fell as low as 73.21 US cents from 74.23 cents immediately before the central bank's statement at 9am. It dropped to a seven week low of 92.50 Australian cents from 93.39 cents. The two year swap rate declined 7 basis points to 3.55 percent as traders increased bets the bank could lower the official cash rate from the 3.5 percent it was held at today.

Governor Graeme Wheeler said inflation could turn negative and its return to within the bank's 1 to 3 percent target band may occur “more gradually than previously anticipated.” Given current circumstances, "we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data,” he said.

That marks a significant shift in the language of the Reserve Bank, which hasn't cut interest rates since since former governor Alan Bollard slashed the OCR to a record low 2.5 percent in March 2011. In last month's monetary policy statement, Wheeler reiterated that hikes in the OCR were “expected to be required at a later stage”.

"The explicit allowance for the OCR to decrease is more dovish than the purely neutral bias the market had expected," said Imre Speizer, market strategist at Westpac Banking Corp. "This is a watershed moment, the RBNZ has held a tightening bias in one form or another since July 2013."

Westpac expects an increase in the OCR in June 2016, but with a 20 percent probability of a rate cut. Speizer said the central bank has also adjusted its assessment of the housing market, with Wheeler noting it was "showing signs of picking up, particularly in Auckland." Westpac expects the bank will tighten macroprudential policy this year in response.

Traders say the kiwi may have further to fall, given increased prospects of a rate cut and the central bank's reiteration that the kiwi remains "unjustifiably high" and that it expects to see “a further significant depreciation.”

"That could see the kiwi move toward the bottom of the band, 72 to 73 US cents, in the next couple of weeks," said Tim Kelleher, ASB Bank's head of institutional FX sales in New Zealand. "The market has got no reason at this point in time to be buying currency."

BusinessDesk.co.nz

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