NZ dollar falls as weak inflation fuels rate cut expectations

Wednesday 20th January 2016

The New Zealand dollar fell after inflation data missed expectations with the global glut of oil reducing petrol prices, stoking bets the Reserve Bank will have to cut interest rates this year.

The kiwi dropped to 63.78 US cents at 5pm in Wellington from 64.70 cents immediately before the release, and 64.33 cents yesterday. The trade-weighted index was down to 70.66 from 71.28 yesterday.

New Zealand consumer prices fell 0.5 percent in the final three months of 2015, more than expected, and pushing the annual pace of inflation to a 16-year low of 0.1 percent. Cheaper petrol underpinned the soft reading and with global prices extending their drop into this year, traders are predicting the Reserve Bank may be forced into cutting interest rates. Weaker stock markets across Asia added to the downbeat tone for the kiwi.

"The markets are increasing the probability of the Reserve Bank acting in March," said Sam Tuck, senior foreign exchange strategist at ANZ Bank New Zealand in Auckland. "The kiwi had a pretty instantaneous reaction this morning and the rest of the day the kiwi has been soft."

Local house prices and sales volumes picked up in December from the same month a year earlier, with regions outside Auckland driving gains. Meantime, another fall in dairy prices at the latest GlobalDairyTrade auction has firmed up economists' expectations Fonterra Cooperative Group will lower its forecast payout to farmers.

New Zealand two-year swap rates dropped nine basis points to a three-year low of 2.58 percent, while 10-year swaps fell five basis points to 3.41 percent.

The local currency declined to 92.88 Australian cents from 93.68 cents yesterday, and sank to 4.1953 Chinese yuan from 4.2325 yuan. It fell to 74.62 yen from 75.57 yen yesterday, and was down to 58.25 euro cents from 59.06 cents. The kiwi was little changed at 45.07 British pence from 45.14 pence yesterday.

BusinessDesk.co.nz

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