NZ dollar weakens as investors pull back bets on interest rate hikes

Friday 30th May 2014

The New Zealand dollar fell as investors pulled back their expectations for future interest rate hikes as they weigh weaker commodity prices and a slide in business confidence.

The kiwi dropped to 84.71 US cents at 8am in Wellington, from 84.80 cents at 5pm yesterday. It touched a low of 84.49 US cents, a level not seen since March 12, before the central bank started hiking interest rates on March 13. The trade-weighted index slipped to 79.07 from 79.18 yesterday.

New Zealand's Reserve Bank has raised the benchmark interest rate twice this year and signalled further hikes are in the pipeline. Investors are pulling back their expectations for rates to rise in the near term on concern about the effect of falling commodity prices on the economy, after Fonterra Cooperative Group pulled back its forecast payouts to farmers following weaker dairy prices, and after business confidence fell for a third month.

"The futures market is now taking off two rate hikes at the front end of the curve," said Martin Rudings, a senior adviser at OMF. "The kiwi essentially was bought up on all those rate hikes and if you take half a percent off you have got to consider its correction is appropriate for that."

Investors who bought the kiwi betting it would rise as interest rates went up, known as a 'long' bet, are now selling the currency, Rudings said.

"There's a lot of longs from offshore that have been taking advantage of the yield that has been priced in the curve so when that starts to disappear those longs exit." he said.

In New Zealand today, traders will be eyeing statistics on building consents for April and Reserve Bank data on household credit.

The kiwi fell to its lowest level against the Australian dollar so far this year, touching 90.93 Australian cents this morning, from 91.37 cents yesterday.

"There's been quite a big build up of long kiwi against the Aussie over the last 18 months and we are just starting to see that being unwound," said OMF's Rudings. "We have seen quite a large flow of selling kiwi/Aussie cross that's just depressing the kiwi. We can't cope with those types of flows very well."

Rudings said the kiwi may have peaked at 91.50 Australian cents for the short term.

The kiwi may remain under pressure until the upcoming Reserve Bank monetary policy statement on June 12 which is expected to provide a clearer track on the future interest rate path, Rudings said.

The local currency is also under pressure from a weaker euro, which is underpinning the greenback, and a decline in US 10-year Treasuries, considered a benchmark for global interest rates, Rudings said.

The New Zealand dollar slipped to 62.28 euro cents from 62.33 cents yesterday, was little changed a 50.67 British pence from 50.70 pence and weakened to 86.18 yen from 86.25 yen.

BusinessDesk.co.nz

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