Dollar holds at lower levels overnight as traders bet interest rates may fall

The New Zealand dollar held at lower levels overnight as traders priced in an increased chance of an interest rate cut after a report yesterday showed wage growth slowed in the March quarter.

The trade-weighted index, a broad measure of the kiwi favoured by the Reserve Bank, was at 77.26 at 8am in Wellington, from 77.16 at 5pm yesterday and 78.02 immediately before the employment data was released at 10:45am yesterday. The local currency was at 75.05 US cents from 74.82 cents yesterday and 75.45 cents before the employment data.

The kiwi dropped yesterday after government data showed annual wage inflation in the private sector slowed to a 0.3 percent pace in the three months ended March 31 and was unchanged on an annual basis at a 1.8 percent rate, lagging behind expectations for wages to increase at a faster pace. That prompted traders to price in a 28 percent chance the Reserve Bank will cut rates at its next meeting, and bet the benchmark will be cut by 38 basis points over the coming year, according to the Overnight Index Swap Curve.

"The data suggests that New Zealand is likely to see a slowdown in growth this year that would allow RBNZ some leeway on easing monetary policy," Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York, said in a note.

"With one of the highest interest rates in the industrialized world, the RBNZ has ample room to lower rates from the current 3.5 percent benchmark level and several banks have already predicted that RBNZ may start doing so as early as June," he said. "Certainly the tepid rate of wage growth should offer New Zealand policy makers some measure of comfort that any easing action will not be inflationary."

The kiwi is likely to remain under pressure and could drift towards the 72 US cent level over the next several weeks, Schlossberg said.

In New Zealand today, Reserve Bank governor Graeme Wheeler is scheduled to speak at a Chamber of Commerce luncheon in Nelson. The speech won't be published.

The New Zealand dollar was trading at 94.07 Australian cents from 93.87 cents yesterday and 95.07 cents before the employment data. It was trading at 66.12 euro cents from 66.60 cents yesterday and 67.46 cents before the data. It was at 49.20 British pence from 49.18 pence yesterday and 49.71 pence before the data. The UK holds its general election today. The local currency was at 89.65 yen from 89.72 yen yesterday and 90.45 yen before the data.

(BusinessDesk)