Dollar continues declines as Reserve Bank seen cutting interest rates

The New Zealand dollar continued its decline overnight, falling to an eight-week low, as speculation grows that the Reserve Bank could start cutting interest rates as early as next month.

The kiwi touched 73.30USc, and was trading at 73.38USc at 8am in Wellington, from 73.83USc at 5pm yesterday. The trade-weighted index dropped to 76 from 76.45 yesterday.

The New Zealand dollar slid as expectations grew that weak inflation, an elevated local currency and falling dairy prices would prompt the Reserve Bank to start cutting interest rates this year. ANZ New Zealand Bank yesterday joined Deutsche Bank and ASB Bank in forecasting 50 basis points of cuts over coming months, and traders are pricing in a 42% chance of a cut in interest rates at the upcoming June 11 meeting, according to the Overnight Index Swap Curve.

"The $NZ/$US has had the dubious honour of being the worst performing currency by some margin over the past 24 hours," Kymberly Martin, senior market strategist at Bank of New Zealand, said in a note. "Increased speculation of Reserve Bank rate cuts appears to have been a key contributor to the weakness."

BNZ says that while the chance of rate cuts has risen, it sees the hurdle to cutting rates as "quite high" and says a cut at the next meeting is "highly unlikely".

Traders are now looking ahead to the Reserve Bank's release of its six-monthly Financial Stability Review tomorrow. The New Zealand dollar could weaken further should the bank signal it is progressing with plans to try to dampen the bubbling housing market through macro prudential measures, potentially paving the way for it to cut rates.

The New Zealand dollar touched 92.82Ac, its lowest level since late January, as traders price in more rate cuts ahead for New Zealand and pull back on their expectations for further rate cuts in Australia. The kiwi was trading at 92.93Ac at 8am from 93.51Ac yesterday before the Australian federal budget announcement tonight.

The local currency dropped to 47.06UKp from 47.88UKp yesterday, touching a four-year low of 47.01UKp overnight, as the pound strengthens following the return of the Conservative government in last week's general election.

The kiwi slipped to 88.15 yen from 88.50 yen yesterday and declined to 65.79 euro cents from 66.21 cents.

(BusinessDesk)