NZ dollar drops as June rate-cut bets fade   24 May 2016

Tuesday 24 May 2016 05:20 PM

NZ dollar drops as June rate-cut bets fade, RBA to stick with inflation target

By Jonathan Underhill

May 24 (BusinessDesk) - The New Zealand dollar fell on speculation the Reserve Bank will refrain from cutting interest rates in June while comments from Australia's central bank that it will retain its inflation targets dragged the kiwi down with the Aussie dollar.

The kiwi fell to 67.19 US cents as at 5pm in Wellington, from 67.94 cents yesterday. The trade-weighted index declined to 72.48 from 73.08 yesterday.

Traders are pricing just a 15 percent chance that RBNZ governor Graeme Wheeler will cut the official cash rate a quarter point to 2 percent with the June 9 monetary policy statement, down from about 80 percent a month ago, yet economists at New Zealand's four biggest banks are split 50-50 on a cut next month. By contrast, the US Federal Reserve is hinting it may yet raise interest rates in June. The kiwi extended its slide as the Australian dollar fell after RBA governor Glenn Stevens said in a speech that there was no need to amend the inflation target band in response to low inflation.

The Australian dollar "was sold quite sharply on the basis they're not going to lower the inflation target so (the RBA) will have to cut rates more to get there," said Imre Speizer, senior market strategist at Westpac Banking Corp. The kiwi was dragged lower as the Aussie fell. In New Zealand, "the market has abandoned the idea of a June cut," Speizer said, adding that he still expects a June cut.

The kiwi had already weakened overnight as Fed officials reiterated the message of recent weeks that its June meeting remains live for a possible rate hike. A decline in commodity prices also weighed on the New Zealand dollar. The CRB Index of 19 commonly traded commodities was down about 0.5 percent overnight and iron ore, a key Australian export, fell in Asia today.

The local currency dropped to 73.43 yen from 74.65 yen yesterday as Japan's currency strengthened against the greenback after the country posted its biggest trade surplus in six years. The kiwi fell to 93.36 Australian cents from 93.67 cents yesterday and declined to 4.4028 Chinese yuan from 4.4474 yuan. It decreased to 59.92 euro cents from 60.49 cents yesterday and dipped 46.37 British pence from 46.79 pence.

The two-year swap rate fell 3 basis points to 2.29 percent and the 10-year swaps fell 3 basis points to 2.89 percent.

(BusinessDesk)

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