Dollar set to end week unchanged, belying midweek volatility

The New Zealand dollar is set to end the week largely unchanged, belying the volatility that saw it fall to a two-month low midweek as expectations grew that the Reserve Bank may cut interest rates as early as next month.

The kiwi was trading at 74.74USc at 5pm in Wellington, from 74.86USc at the New York close last week and 75.03 cents at 8am this morning. At the start of the week, nine currency advisers in a BusinessDesk survey predicted the kiwi would fall, while three said it would probably remain largely unchanged, and none picked it to rise.

The local currency dropped to a two-month low of 73.14USc on Wednesday, shortly after the Reserve Bank announced additional measures to try to dampen Auckland's bubbling housing market, on concern that a price correction could threaten financial stability. Stepping up measures to tackle the housing market was seen as giving the Reserve Bank additional freedom to reduce interest rates as it eyes weaker dairy commodity prices and an elevated currency.

"That increases the probability of easing because it removes one area of concern that was pointing towards the need to increase the cost of credit in this country," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand. "Interest rates were definitely the key theme for the week."

ANZ this week changed its call for interest rates, saying the Reserve Bank could reduce the 3.5% benchmark as early as its meeting next month and follow up with another cut in July to take the rate to 3%. Deutsche Bank and RBC Capital Markets are also forecasting a cut next month, while ASB Bank and First NZ Capital expect the first reduction to come in September.

The kiwi has been pushed around this week as traders mulled whether a reduction in Chinese interest rates was good or bad for New Zealand, whether the Reserve Bank still considered the local currency's level as "unjustified" and whether the US economy would pick up in the second quarter following a softer first quarter, said ANZ's Mr Tuck.

The focus tonight will be on the first US economic data releases for May, including the Empire New York manufacturing survey and the University of Michigan consumer confidence survey, along with industrial production for April.

The New Zealand dollar dipped around lunchtime today, as it tracked a weaker Aussie after Atlas Iron said it would resume full production, raising concern oversupply of iron ore would further depress prices.

"It took the kiwi along for the ride," Mr Tuck said. "It's a very light, nervy market at the moment and any decent sellers are moving the market."

Coming up next week is the GlobalDairyTrade auction, the Reserve Bank survey of inflation expectations, migration data, the government's budget and consumer confidence.

Today, the New Zealand dollar slipped to 65.50 euro cents from 65.75 cents this morning, weakened to 47.38 British pence from 47.56p, edged lower to 92.74Ac from 92.82Ac and declined to 89.21 yen from 89.39 yen.

The trade-weighted index, the broader measure of the currency favoured by the Reserve Bank, fell to 76.63 from 76.87 this morning and 77.31 at the start of the week.

(BusinessDesk)