NZ dollar falls back below 70 US cts after weak growth spurs rate cut calls

Thursday 18th June 2015

The New Zealand dollar fell back below 70 US cents in local trading after weaker than expected economic growth in the first three months of the year spurred speculation that the Reserve Bank will cut interest rates more aggressively.

The kiwi fell to 68.90 US cents at 5pm from 69.94 cents at 8am and 69.66 cents yesterday. It spiked above 70 cents after the US Federal Reserve lowered its estimate for global growth, prompting some investors to question whether the world's biggest central bank will raise interest rates this year.

New Zealand's gross domestic product grew 0.2 percent in the three months ended March 31, a third of the Reserve Bank's forecast. The slower pace of growth stoked expectations the central bank will cut interest rates after Governor Graeme Wheeler lowered the official cash rate last week and signalled one more cut to come this year. Traders have priced in 40 basis points of cuts over the coming 12 months, according to the Overnight Index Swap curve, implying a second cut has almost been fully priced in by the market.

"The market was always going to get carried away on the downside on rate cuts," said Tim Kelleher, head of institutional foreign exchange sales at ASB Institutional in Auckland. "67-69 (US cents) is a good buy. I'd still sell the kiwi on rallies."

Kelleher said ASB expects the Reserve Bank will cut the 3.25 percent OCR in July, but won't lower it further.

New Zealand's two year swap rate fell to 3.07 percent at 5pm in Wellington from 3.15 percent yesterday, and the 10 year swap rate declined to 3.86 percent from 3.99 percent.

The kiwi dollar dropped to 60.66 euro cents from 61.87 cents yesterday as negotiations between Greece and its European creditors continued to founder. It fell to 43.53 British pence from 44.53 pence yesterday, and sank to 84.86 yen from 86 yen.

The local currency fell to 84.86 Australian cents from 90.17 cents yesterday, and dropped to 4.2804 Chinese yuan from 4.3247 yuan. The trade weighted index declined to 71.74 from 72.73 yesterday.

BusinessDesk.co.nz

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