NZ dollar drops after report on credit rating; Reserve Bank, Fed meetings loom

The New Zealand dollar dropped in late trading after a Moody's Investors Service executive discussed stripping the country of its Aaa credit rating, and ahead of the Reserve Bank and Federal Reserve reviews which are both expected to keep monetary policy unchanged.

The kiwi dropped to 82.25 US cents at 5pm in Wellington from 82.49 cents at 8am and 82.64 cents yesterday. The trade-weighted index fell to 76.06 from 76.20 yesterday.

Moody's senior vice president Steven Hess told Bloomberg that the ratings agency considered cutting the country's sovereign credit rating with a stable outlook before affirming it in its last review. Hess said the country's large current account deficit left it relying on foreign investors when hit with shocks, such as from Fonterra Cooperative false food scare and Canterbury earthquakes.

"They affirmed the rating, but they did consider cutting it - it just highlights the fact that we are still vulnerable. It's nothing we don't know," said Tim Kelleher, head of institutional FX sales at ASB Institutional in Auckland. "The kiwi's got strong support around 82.25 US cents."

New Zealand's Reserve Bank governor Graeme Wheeler is expected to keep the official cash rate at a record-low 2.5 percent when he reviews monetary policy tomorrow, though economists are looking for a softening on the future track of hikes given the persistent strength in the local currency. Wheeler has been steered clear of lifting interest rates in response to a booming property market and increasing building activity for fear of fuelling more gains in the kiwi dollar.

"The Reserve Bank's going to be more dovish than they were in September because the currency is higher," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland. "Interest rates have been priced in fully, though the currency might dip a little."

Traders are betting New Zealand's central bank will hike the key rate 76 basis points over the coming 12 months, according to the Overnight Index Swap curve. That's down from as much as 97 basis points in mid-September.

The local meeting comes after the Federal Open Market Committee reviews US monetary policy, and traders will be looking to see whether the Fed has pared back its growth expectations in the wake of the partial government shutdown. The Fed's planned tapering of its money printing programme has already been delayed, and investors don't expect it to start until March next year.

The local currency advanced to 80.75 yen at 5pm in Wellington from 80.57 yen yesterday and slipped to 86.80 Australian cents from 86.94 cents. It edged down to 59.89 euro cents from 59.98 cents yesterday and was little changed at 51.34 British pence from 51.35 pence.