NZ dollar falls on TWI basis as prospects of rate-cut contrast with Fed looking to hike

The New Zealand dollar fell on a trade-weighted basis on expectations weak inflation will prompt the Reserve Bank to cut interest rates in June while the US Federal Reserve has been giving more hints it will hike rates this year.

The trade-weighted index fell to 72.78 as at 5pm in Wellington, from 72.91 on Friday. The kiwi traded at 68.41 US cents, from 68.36 cents at the New York close and 68.54 cents on Friday in Asia.

The kiwi fell on Friday after the Reserve Bank of Australia lowered its forecast track for inflation in its monetary policy statement, reminding traders that both countries are dealing with prolonged weak price pressures that are below their central banks' targets. Both the RBA and RBNZ could cut their benchmark rates next month, giving investors less reason to hold the currencies against a stronger greenback.

The RBA's weaker inflation forecast "is very consistent with what's been seen in the New Zealand economy as well," said Angus Nicholson, market analyst at IG Markets. "There's a pretty good case to see a rate cut in New Zealand at the June meeting."

Meanwhile, the kiwi "sold off sharply last week in line with a steady rally in the US dollar" which has been propelled by more hawkish statements from Fed officials, Nicholson said. Federal Reserve Bank of New York president William Dudley said in an interview with the New York Times on Friday that it was a "reasonable expectation" that the fed would raise its benchmark rate twice this year.

"A number of Fed speakers have come out and been more hawkish," Nicholson said. He added that it was plausible that the fed would move to hike rates in the third quarter, and that combined with a cut by the RBNZ could drive the kiwi down to between 64 US cents and 65 cents this year, he said. There was also a risk that a US dollar rally would spur China to weaken the yuan, which would have a flow-on effect of driving down the kiwi, he said.

Some 17 out of 23 analysts expect the RBA to cut its cash rate by 25 basis points to 1.5 percent by August, according to a Bloomberg survey, while traders are pricing in a 78 percent chance of a 25 basis point cut by the RBNZ in June, and a more than 50 percent chance of a follow-up 25 basis point cut by November, according to the overnight interest rate swap market.

"With the RBA expected to struggle to reach its inflation target over the next couple of years, a number of analysts changed their calls to predict further rate cuts," Bank of New Zealand currency strategist Jason Wong said in a note. "The New Zealand dollar fell in sympathy, with investors concluding that with the same forces affecting New Zealand, further RBNZ easing was also more likely."

The greenback held up on Friday in the US, even after a weaker-than-expected US non-farm payrolls release that showed the world's biggest economy added 160,000 jobs last month, compared with expectations of about 200,000, with concern about the headline number offset by figures showing annual wage inflation beat estimates at 2.5 percent.

The New Zealand dollar was little changed at 92.71 Australian cents and fell to 59.95 euro cents from 60.10 cents. It fell to 4.4473 yuan from 4.4578 yuan and was little changed at 73.48 yen from 73.43 yen. The kiwi traded at 47.36 British pence from 47.33 pence.

The two-year swap rate rose about 3 basis points to 2.15 percent and the 10-year swaps rose 3 points to 2.85 percent.

(BusinessDesk)