Dollar falls as twin-pronged housing measures raise prospect of rate cut

The New Zealand dollar fell on speculation the government's measures to curb a rampant Auckland housing market, added to the Reserve Bank own efforts, could give the bank more room to cut interest rates.

The kiwi dollar was little changed at 74.35 US cents at 5pm in Wellington from 74.26 cents at 8am, and down from 74.72 cents on Friday in New York. The trade-weighted index declined to 76.30 from 76.63 last week.

Traders are pricing in 48 basis points of cuts to the 3.5 percent official cash rate over the coming 12 months after the government said it will tighten up on the taxation of property speculators, adding to measures announced by the Reserve Bank last week that it will impose tougher lending requirements for investors in the Auckland housing market. Tepid inflation has meant the central bank has dropped its bias towards higher interest rates, though any move to ease has previously been seen as unlikely for fear of fuelling the buoyant Auckland property market.

"The kiwi had an early drop thanks to the government announcement with the view that that twin-pronged attack does signal pro-activeness and communication," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand in Auckland. "We know the RBNZ is worried about dairy and also thinks the New Zealand dollar is too high on a structural basis, is unjustified and unsustainable, so monetary policy has more room to move given these measures have been tackled."

New Zealand's producer prices index for the March quarter and the Reserve Bank's survey of inflation expectations tomorrow will be watched to see whether price pressures are still fairly muted, while the GlobalDairyTrade auction on Tuesday in the US will also be monitored to gauge global appetite for milk products.

A BusinessDesk survey of 12 advisers predicts the kiwi will trade in a range of 72.75 US cents and 76.60 cents this week, with seven calling it lower, four neutral and one predicting it will gain.

Activity in New Zealand's services slowed in April, while continuing to expand, according to the BNZ-BusinessNZ performance of services index, as stocks/inventories and supplier deliveries led the decline.

The local currency was little changed at 92.66 Australian cents at 5pm in Wellington from 92.73 cents last week, and fell to 4.6119 Chinese yuan from 4.6372 yuan. It declined to 65.02 euro cents from 65.49 cents, and edged down to 47.27 British pence from 47.38 pence. The kiwi slipped to 88.93 yen from 89.21 yen last week.

New Zealand's two-year swap rate decreased to 3.35 at 5pm in Wellington from 3.37 last week and the 10-year swap rate dropped to 3.92 from 3.98.

(BusinessDesk)