Kiwi gains as traders call Bollard's bluff on rates cut

BUSINESSDESK: The New Zealand dollar gained in local trading in spite of an attempt to Reserve Bank governor Alan Bollard to talk down the currency when he kept interest rates at their record low this morning.

The kiwi rose to 81.60 US cents at 5pm from 81.34 cents at 8am and 81.15 cents late yesterday.

The trade-weighted index gained to 72.57 from 72.35 yesterday.

Dr Bollard held the official cash rate at 2.5% today due to a “restrained” inflation outlook, and warned if the currency stays “strong without anything else changing, the bank would need to reassess the outlook for monetary policy settings”.

That fed into interest rate markets, with the five-year swap rate falling 5.5 basis points to 3.155, though foreign exchange markets were less pessimistic on the prospect of a rate cut.

“If they’re trying to talk the currency down, they’re going about it the completely wrong way,” said Mike Jones, currency strategist at Bank of New Zealand.

“If the currency goes up another 5 US cents, the Reserve Bank probably will be cutting [at the next meeting] – you’ve got to take them at their word.”

Traders are now betting the central bank will cut 5 basis points from the OCR in the coming 12 months, according to the Overnight Index Swap curve.

Because the bank moves in 25 basis point lots, that means the market is giving Dr Bollard an outside chance of cutting rates over that period.

Finance Minister Bill English added to the downbeat tone for New Zealand, citing a billion-dollar deterioration in the government’s operating budget forecast.

Early budget estimates an operating deficit of $670 million in the 2014-15 financial year, when the government pledged to get the books back in the black.

Mr English reaffirmed the government’s commitment to reaching surplus, and said this year’s zero Budget will likely be followed by another year of little or no new spending in 2013.

Mr Jones said the discovery of a heifer with mad cow’s disease in California this week may have offset some of the pessimism about New Zealand as it may stoke demand for local beef exports.

Indonesia, New Zealand’s second-biggest beef export destination, today suspended US beef imports.

Mr Jones expects a downgrade in Fonterra’s forecast payout to farmers would be a big enough catalyst to drag the currency down.

The dairy exporter trimmed 15 cents from this year’s forecast payout last month, and its board is expected to review that again next month.

The New Zealand dollar was little changed at 78.68 Australian cents from 78.64 cents and rose to 66.20 yen from 66.06 yen.

The kiwi advanced to 61.67 euro cents from 61.48 cents and gained to 50.44 British pence from 50.23 pence.