NZ dollar heads for 2% decline on TWI basis after RBNZ cuts rates

Friday 12th June 2015

The New Zealand dollar is heading for a 2 percent weekly decline on a trade-weighted basis after the Reserve Bank surprised some investors with a rate cut yesterday, citing a deteriorating terms of trade on falling dairy prices and a recovery in oil prices.

The trade-weighted index, a measure of the kiwi against a basket of currencies, fell to 73.16 at 5pm in Wellington from 74.66 on Friday in New York last week, and is little changed from 73.12 yesterday. The kiwi traded at 70.07 US cents from 70.17 cents yesterday and is heading for a 0.2 percent dip on the week from 70.23 cents at last Friday's close.

A BusinessDesk survey of 10 currency analysts on Monday predicted the kiwi would trade between 67.75 US cents and 74 cents this week, with eight picking the kiwi to fall and two saying it would rise.

The local currency tumbled about 2 US cents after Reserve Bank governor Graeme Wheeler cut the official cash rate a quarter-point to 3.25 percent, surprising some quarters in the market who were expecting the easing cycle to start later. Wheeler pointed to a deteriorating terms of trade as key to the need for a cut, and said the currency was still over-valued and needed to depreciate further to help rebalance the economy with annual inflation tracking near zero. At the same time as the re-rating in the New Zealand dollar, Australian employment figures and UK economic data bolstered demand for their respective currencies, which weighed on the kiwi on a trade-weighted basis.

"After the move yesterday, people are happy to do nothing," said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional in Auckland. "The TWI is quite a bit lower with big moves in the kiwi/Aussie, continued pressure on the kiwi/Sterling and even in the kiwi/euro."

The local currency is heading for a 1.9 percent fall against the Australian dollar, a 2.1 percent decline against the pound and a 1.6 percent drop against the euro. It increased to 90.51 Australian cents at 5pm in Wellington from 90.31 cents yesterday, slipped to 45.17 pence from 45.28 pence, and gained to 62.36 euro cents from 62.08 cents.

New Zealand government data today showed food prices rose at an annual pace of 0.8 percent in May, led by more expensive meat, poultry and fish, while wool prices slipped from their recent highs at the latest North Island auction.

Next week, traders will be watching the Federal Reserve's policy review, which might toss up a surprise rate hike, with New Zealand's first-quarter gross domestic product and the latest Fonterra Cooperative Group dairy auction also in the spotlight.

New Zealand's two-year swap rate fell to 3.19 percent at 5pm in Wellington from 3.23 percent yesterday, and the 10-year swap rate declined to 4.04 percent from 4.15 percent.

The local currency was little changed at 86.46 yen from 86.45 yen yesterday, and declined to 4.3488 Chinese yuan from 4.3546 yuan.

BusinessDesk.co.nz

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