Dollar drops; RBNZ sees prolonged low rates

Thursday 30th April 2009

The New Zealand dollar tumbled against the greenback and the yen after the central bank slashed the official cash rate and indicated rates will remain low until late-2010.

The kiwi dollar sank 1.6% against the greenback and 1.8% versus the yen after Reserve Bank Governor Alan Bollard slashed the OCR by 50 basis points to a record-low 2.5%. He said rates could still fall “modestly” in the coming quarters, and the OCR would remain “at or below the current level” until the latter part of next year.

Investors’ appetite for high-yielding, or riskier, assets was bolstered before the announcement by up-beat Eurozone consumer confidence, comments from the Federal Reserve that the worst of the US recession may be behind it and gains in global equities.

The 50 point cut in the OCR was “exactly what economists picked,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. The statement was “more dovish than the market expected,” and Kelleher doubts it will push the currency below 55 US cents.

The kiwi sank to 56.35 US cents from 57.28 cents immediately before the announcement, and traded at 57.11 cents in New York yesterday. It tumbled to 54.94 yen from 55.93 yen before the statement, from 55.43 yen yesterday, and dropped to 42.50 euro cents from 43.16 cents prior to the cut. It traded at 43.12 euro cents yesterday.

Kelleher said the currency may trade between 56 US cents and 56.75 cents today as it continues to get support between 53.50 cents and 55 cents. This is still within the 54.50 cent to 59 cent range that it’s been trading in for the last six months, he said.

Bollard jawboned the currency down at the start of the month when it pushed close to 60 US cents after the central bank forecast it to fall in the near-term. He told a media conference this was an “unusual” event, and he didn’t expect to make a similar move in the foreseeable future.

The New Zealand dollar may push down to 77.25 Australian cents, Kelleher said, after it fell to 77.81 cents from 78.79 cents immediately before the announcement. It traded at 79.47 cents in New York yesterday.

The Reserve Bank of Australia probably reached a trough in its easing cycle, according to ANZ National economists, and Bollard’s decision to cut the OCR to 2.5% increased the yield advantage Australia has over New Zealand, which will probably benefit the Australian dollar.

Businesswire.co.nz

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