Dollar falls as expected rate cut this week seen as start of deeper easing cycle

The New Zealand dollar fell to its lowest level in more than a week on speculation an interest rate cut widely expected from the Reserve Bank this week may be the start of a deeper easing cycle.

The kiwi traded at 71.11 US cents as at 5pm in Wellington, and earlier dipped as low as 70.86 cents after unexpectedly weak Chinese trade data, from 71.31 US cents in late New York trading on Friday. The trade-weighted index fell to 75.61 from 75.92 at the end of last week.

Twenty-four out of 25 economists in a Reuters poll expect the Reserve Bank to cut the official cash rate a quarter point to 2 percent on Thursday and to make at least one more cut, to 1.75 percent, this year. However, some are calling for steeper cuts to lift stubbornly low inflation back within the bank's target band. The kiwi dropped in New York on Friday after stronger-than-expected US non-farm payrolls and dipped briefly today after figures showed China's imports fell 12.5 percent in July from a year earlier raising questions about demand in New Zealand's biggest market.

"The market is very positioned for a rate cut by the Reserve Bank this week," said Angus Nicholson, a market analyst at IG Markets. "They are going to cut rates at the meeting this week and they'll want to maximise its effect, particularly in the currency, by foreshadowing more cuts to come."

Nicholson said there was "a good chance it could even be a full 1 (percentage point) of rate cuts," taking the OCR to 1.25 percent by the first half of 2017, "based on where inflation is going". IG Markets is forecasting the Reserve Bank of Australia's cash rate to bottom out at 1 percent, from 1.5 percent now.

He said there would be no question about deeper cuts if not for the heat in Auckland's housing market.

The kiwi was as high as 72.12 US cents in New York on Friday before a US Labor Department report showed US payrolls rose by 255,000 in July, compared to economist expectations of 180,000, while figures for the previous two months were revised higher. The strong labour market indicators revived speculation the Federal Reserve will lift interest rates, a possibility that has been dialed back in the face of global uncertainties such as Britain's vote to leave the European Union.

The local dollar fell to 54.35 British pence, from 54.59 pence at the New York close on Friday. The kiwi dropped to 93.42 Australian cents from 93.65 cents in late New York trading on Friday and was little changed at 72.55 yen from 72.59 yen. It fell to 64.06 euro cents from 64.33 cents and slipped to 4.7365 Chinese yuan from 4.7463 yuan.

New Zealand's two-year swap rate was little changed near a record low at 1.99 percent and the 10-year swaps rose 6 basis points to 2.47 percent.

(BusinessDesk)

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