The New Zealand dollar dropped
sharply today after the Reserve Bank surprised some by
keeping its official cash rate at 2.5 per cent.
While the prevailing view was that the bank would wait until
March before firing its first monetary salvo in nearly three
years, some participants had nevertheless priced in a 25
basis-point rate hike at today's rate review.
When it didn't eventuate, the Kiwi fell from US82.63c before
the release to US81.82c soon after.
The Kiwi initially recovered some ground to trade over US82c
but by late in the trading day, it had dropped back to
Foreign exchange strategists saw the day's decline as a blip.
Longer term, some expect the currency to come under downward
pressure as the year progresses.
Just before the Reserve Bank's release, the US Federal
Reserve said it would push ahead with its plan to cut its
The Fed's so-called tapering activities, provided they are
backed up a stronger US economic data, are expected to put
downward pressure on the Kiwi-US exchange rate this year.
BNZ market strategist Kymberly Martin said both the Fed's and
the Reserve Bank's messages were well anticipated but she
said the local market had nevertheless priced in a 35 per
cent chance of a rate hike.
"There was a certain element of shock for those who were
expecting a hike and the Kiwi responded initially with a
kneejerk decline," Martin said.
She said there was nothing in the messages from either
central bank that would alter perceptions of where the Kiwi
would go from here.
"But we think the Kiwi has peaked and we don't expect it to
get back above US86c," Martin said. BNZ expects the currency
to remain supported within a 81c to 84c range for the first
half of this year at least.
In the second half, the bank expects New Zealand's terms of
trade to peak and for the gap between the New Zealand and US
economies to narrow.
"Those two factors need to come together for us to see the
New Zealand dollar start to decline," Martin said.
ANZ senior foreign exchange strategist Sam Tuck expects the
Kiwi to remain resilient in the early part of the year, with
US83c likely by the end of the March quarter, falling to
US82c by the end of the June quarter.
But like the BNZ, ANZ expects the exchange rate to drop in
the second half. Tuck expects to see the currency at US80c
for end of September quarter and US78c by the year's end.
"The rationale is we expect global dynamics to take over by
the second half of the year and the US economy - and indeed
other developed markets such as Europe and the UK- to narrow
the performance gap to the NZ economy," Tuck said.
The prospects of a weaker NZ dollar is not a uniform view;
HSBC remains bullish on the Kiwi, based on what it expected
to be a boom year for the economy.
HSBC expects the currency to power ahead to US87c this year,
rising to US88c in 2015.
- By Jamie Gray, APNZ