Kiwi drops sharply on OCR news

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 US81.80c.

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 bond-buying programme.

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 business reporter

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