Dollar steady, may slide as RBNZ prepares to cut rates

Monday 9th March 2009

The New Zealand dollar was little changed above 50 US cents and may weaken this week on speculation the central bank will cut the official cash rate to a record low.

Economists trimmed their bets on the size of a cut to the OCR on March 12 after the Reserve Bank of Australia held its key rate unchanged at 3.25% last week. The RBA's decision came a day before figures showed Australia's gross domestic product shrank 0.5% in the fourth quarter. In New Zealand, the recession may have extended for a fifth quarter, according to Treasury estimates.

"In recent missives, the RBNZ has expressed deep concern about the impact of the global recession which, if anything, continues to intensify," said Danica Hampton, currency strategist at Bank of New Zealand. Still, the RBA's decision to keep rates on hold highlighted that "economic conditions in this neck of the woods aren't nearly as severe as those seen elsewhere," she said.

"For that reason we expect the RBNZ to affect a more moderate, 50 basis point cut on Thursday, compared to the substantial cuts made in recent meetings."

The New Zealand dollar traded at 50.25 US cents from 50.16 cents in New York on Friday. Against the Australian dollar, it strengthened to a two-week high of 78.52 cents from 73.34 cents. The kiwi was at 49.41 yen from 49.30 and at 39.7 per euro from 39.61.

Governor Alan Bollard flagged the prospect of further rate cuts when he slashed the OCR by 100 basis points to 3.5% on January 29 and economists predict the rate will slip to 2.5% by mid-year.

Still, some investors say Bollard may be reaching the end of the easing cycle, the steepest since the OCR was introduced in 1999. The kiwi dollar has dropped 27% against the US dollar in the past six months, raising the prospect of more imported inflation once the economic downturn abates.

The kiwi dollar initially climbed in New York on Friday after US Labor Department figures showed the unemployment rate rose to a 25-year high of 8.1% last month, with 651,000 jobs lost.

Some 4.4 million American jobs have now been lost since December 2007. A total of 12.5 million people were unemployed last month, according to the Labor Department's non-farm payrolls report.

By Jonathan Underhill

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