RBNZ's 'clear' message pushes kiwi down

The Reserve Bank's "clear" message that interest rates are set to plumb a new record-low achieved got the desired effect in pushing the kiwi dollar to a month-low.

The central bank says "further easing is likely" with the strong currency 6% above the RBNZ's expectations on a trade-weighted basis and making it difficult to meet the mandated target of keeping inflation between 1-3% over the medium term.

Consumer prices rose an annual 0.4% in the June quarter, its seventh quarter below the band with the strong kiwi's deflationary effect being compounded by last year's slump in oil prices.

The kiwi fell to 69.67USc from 70.18USc immediately before the statement while the trade-weighted index dropped to 74.82 from 75.40. Two-year swaps fell seven basis points to 2.01%.

"The governor delivered a pretty clear dovish statement which is really giving things a good nudge," OMF senior dealer Mark Johnson says.

"The market was looking for a dovish assessment to essentially confirm an August rate cut. It has that and the market is now pricing in in a 96% chance of a cut in August, it doesn't get much better than that."

OMF's Mr Johnson says the kiwi has broken through two important levels –70.50USc and 69.90USc – which opens the door to an even steeper decline.

The Reserve Bank has been reluctant to cut the official cash rate too far for fear of further inflaming a housing market that's threatening financial stability in a world where rates are near zero, making New Zealand assets offer better returns and stoking demand for the currency.

The new loan-to-value ratio restrictions for banks and the unscheduled economic update raised expectations the RBNZ would try to talk down the currency and signal more rate cuts.

ANZ Bank New Zealand senior economist Philip Borkin says the RBNZ statement is directed at the strength of the currency, and that it "very likely" indicated two more rate cuts.

"Together with the latest LVR limit proposal, the RBNZ appears to have gone into full attack mode in an attempt to tackle some of the considerable tensions it is facing," Mr Borkin says.

"For the market to push a more aggressive easing cycle beyond that we need to see concrete action from the RBNZ, as well as evidence that the domestic data flow is turning and macro-prudential tools are biting."

Major central banks running near-zero interest rate monetary policies has been one of the prime sources of the kiwi's strength.

Recent US data has prompted traders to increase the chance the Federal Reserve will raise interest rates before the year's out, while expectations have dimmed that the Bank of England will have to cut rates in the wake of the UK's vote to quit the European Union.

OMF's Mr Johnson says that means if governor Graeme Wheeler delivers a rate cut next month, it should buy New Zealand some time before other central bank actions reduce the allure of the kiwi.

(BusinessDesk)

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