Dollar falls before RBNZ rate cut

By Paul McBeth

Tuesday 27th January 2009

The New Zealand dollar fell, reaching a record low against the euro, amid speculation the central bank may be preparing for a deeper-than-expected cut to interest rates when it announces its review on monetary policy on Thursday.

Reserve Bank Governor Alan Bollard is expected to cut the official cash rate by at least 100 basis points, reducing the kiwi dollar's yield advantage over the US dollar, euro and yen.

British bank Barclays Plc announced that it was poised to make a significant profit for 2008, and would not require capital from the British government. The statement drove Barclays' stock up 73% and sparked a rally in European financials that lifted the euro against the yen and US dollar.

"The kiwi is underperforming ahead of the Reserve Bank rate cut," said Tim Kelleher, corporate risk manager at ASB Bank. Some investors are "preempting" a potential cut by Bollard of the more than the forecast 100 basis points, he said.

The New Zealand dollar slumped to 39.88 euro cents from 40.45 cents yesterday, and dropped to 52.32 US cents from 52.48 cents. It fell to 79.82 Australian cents from 80.11 cents yesterday, and decreased to 46.52 yen from 46.75 yen.

Kelleher said the kiwi may trade between 51.50 US cents and 53.50 cents until the central bank reviews monetary policy on Thursday morning. Bollard has been slashing rates since July last year to help drag the economy out of its first recession since 1999, cutting the OCR by 325 points to 5%.

The currency will be under scrutiny tomorrow when Fonterra Group Cooperative, the world's largest dairy exporter, announces its dairy payout to farmers. "Unless it's a really bad number, it won't change the dollar too much," Kelleher said. He predicts the cooperative will downgrade prices to between $5.20 and $5.50 per kilogram of milk solids.

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