NZ dollar falls to 7-1/2 month low after RBNZ reins in rate hike track

Thursday 11th September 2014

The New Zealand dollar fell to its lowest in seven-and-a-half months after the Reserve Bank cut half a percentage point from its projected track for future rate hikes as tame inflation dulls the need for more aggressive policy.

The kiwi fell as low as 81.78 US cents, the lowest since Jan. 29, trading at 81.86 cents at 5pm in Wellington from 82.36 cents at 8am, unchanged from yesterday. The trade-weighted index dropped to 78.36 from 78.84 yesterday.

Reserve Bank governor Graeme Wheeler kept the key rate at 3.5 percent, as expected, while pulling back the forecast track for the 90-day bank bill rate, seen a proxy for the OCR. Wheeler also kept his heightened rhetoric in talking down the currency, reiterating its persistent strength "unjustified and unsustainable."

"The bank bill rate track has managed to take the market by surprise to the extend he pared it back," said Mark Johnson, senior dealer at OMF in Wellington. "Now the focus is squarely on the currency and he has made it pretty clear that it's creating headwinds for the tradable sector."

The kiwi dollar has already dropped 5 US cents since July when Wheeler ramped up his attempts to jawbone down the currency, and traders speculated the central bank intervened in foreign exchange markets earlier this month. Wheeler declined to comment on whether the bank had been active at a press conference in Wellington.

The Reserve Bank expects the kiwi dollar to significantly depreciate, particularly as the Federal Reserve starts moving away from running a zero interest rate policy, and next week's Federal Open Market Committee review of US policy will be keenly watched.

OMF's Johnson said the currency could fall to 80 US cents by the end of the year, with any bounces an opportunity to sell.

The kiwi dropped to 89.10 Australian cents from 89.85 cents yesterday after Bureau of Statistics figures showed the jobless rate at 6.1 percent, below expectations, with a surge in part-time employment driving an additional 121,000 jobs in the month.

The local currency fell to 87.52 yen from 87.68 yen yesterday, and declined to 63.42 euro cents from 63.72 cents. It decreased to 50.53 British pence from 51.11 pence yesterday.

BusinessDesk.co.nz

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