Dollar heads for 0.9% weekly decline as soft growth adds to prospects of rate cut

The New Zealand dollar is heading for a 0.9% weekly decline against the greenback after slower than expected economic growth spurred speculation the Reserve Bank will cut interest rates more aggressively.

The kiwi fell to 69.21USc at 5pm in Wellington from 69.81USc on Friday in New York last week. It traded at 69.32USc at 8am and 68.94USc yesterday. The trade-weighted index increased to 71.94 from 71.77 yesterday and is heading for a 1.6% weekly drop.

A BusinessDesk survey of 12 currency advisers on Monday predicted the kiwi would trade between 68USc and 71.80USc this week. Seven said the currency would probably fall, three picked it to move higher and two bet it would remain largely unchanged.

Government data yesterday showed New Zealand's gross domestic product grew 0.2% in the three months ended March 31, a third of the pace forecast by the Reserve Bank in its June monetary policy statement released just last week. The central bank kicked off a tightening cycle last week with a quarter-point cut to the official cash rate, lowering it to 3.25%, and signalled more were to come. Finance Minister Bill English told Bloomberg News the Reserve Bank needed to put more emphasis on inflation which had been running below the 2% midpoint target for several years and "plenty of room" to cut rates.

"The market certainly seized upon it [the GDP report] and built in the chance of another rate cut," said Michael Johnston, senior trader at HiFX in Auckland. "That's really taken a lot heat out of the kiwi."

Traders have priced in 40 basis points of cuts to the OCR over the coming 12 months, according to the Overnight Index Swap curve, implying they see a high chance of a third reduction later this year.

New Zealand's two-year swap rate decreased to 3.06% at 5pm in Wellington from 3.07% yesterday, and the 10-year swap rate increased to 3.87% from 3.86%.

New Zealand consumer confidence slipped in June, while remaining above its long-run average as respondents in the ANZ-Roy Morgan survey grew wary about the outlook for the nation's economy.

The kiwi dollar advanced to 60.90 euro cents from 60.67 cents yesterday as investors continue to watch the stalled talks between Greece and its European creditors that may lead to the Mediterranean nation defaulting on debt obligations.

The local currency climbed to ¥85.12 at 5pm in Wellington from ¥84.86 yesterday after the Bank of Japan retained its asset purchase programme and remained upbeat about the prospects for the world's third-biggest economy.

The New Zealand dollar gained to 4.2930 Chinese yuan from 4.2804 yuan yesterday, and was little changed at 43.58 British pence from 43.54p. The kiwi fell to 89.05Ac from 89.23Ac yesterday, and is heading for a 1.3% weekly decline against its transtasman counterpart.

(BusinessDesk)