Dollar drops to 2-month low on outlook for interest rate cuts

The New Zealand dollar fell to a two-month low as expectations of interest rate cuts weighed on the currency.

The kiwi touched 72.77 US cents this morning, and was trading at 73.15 cents at 8am in Wellington, from 73.60 cents at 5pm yesterday. The trade-weighted index declined to 75.82 from 76.20 yesterday.

The TWI, the broad measure of the currency favoured by the Reserve Bank, has declined 3.9 percent this year as the bank took interest rate hikes off the table, increased steps to try and curb Auckland house prices, and said it was monitoring conditions that could prompt it to cut rates amid low inflation, weak dairy prices and an elevated currency. Traders are pricing in a 42 percent chance that governor Graeme Wheeler will reduce the 3.5 percent benchmark at the June 11 monetary policy statement, according to the Overnight Index Swap Curve.

"There is a general lack of ability for the kiwi to get off the ground at the moment," said Stuart Ive, senior dealer, foreign exchange, at OMF. "The momentum is continuing to the south side and I think will probably continue to do so."

Some traders are betting that Wheeler is likely to reduce interest rates in June because the quarterly MPS allows him a fuller chance to explain his decision at a press conference, compared with just a one-page statement at July's official cash rate review. Still, he may hold off while signalling future interest rate cuts are likely, in an attempt to further weaken the currency.

"The expectation of rate cuts does far more to a currency than cutting them sometimes," said OMF's Ive. "He may indicate that he is looking to cut rates but if he held off at that meeting, it would keep pressure on the kiwi, the kiwi dollar would remain depressed."

The local currency is also being weakened by expectations US interest rates are set to rise, and the combined movements could see kiwi fall below 70 US cents, Ive said.

Today, the New Zealand government releases its 2015 budget at 2pm. Migration data for April is published at 10:45am and credit card spending data for April is released at 3pm.

The New Zealand dollar fell to 92.69 Australian cents from 92.91 cents yesterday, slipped to 65.85 euro cents from 66.12 cents, declined to 47.06 British pence from 47.47 pence and weakened to 88.67 yen from 89.03 yen.

(BusinessDesk)