Kiwi's slide blamed on RB outlook

The New Zealand dollar can claim the dubious honour of being the worst performing major currency against the United States currency over the past month, and by some margin.

BNZ currency strategist Raiko Shareef said the underperformance could be squarely attributed to near term Reserve Bank official cash rate expectations.

The Reserve Bank will release its June Monetary Policy Statement on Thursday. Economists are divided about whether Reserve Bank Governor Graeme Wheeler will cut the rate from 3.5% or leave it unchanged until later this year or early 2016.

Since early May, the market has moved from pricing a 24% chance of a 0.25% cut to the OCR in June to a 50% chance last week. However, Mr Shareef viewed such short odds on near term rate cuts - in June or July - as too rich.

''In short, with inflation expectations still nearer to 2% than 1%, and domestic demand still very strong, the case for immediate policy easing remains to be made.''

If the Reserve Bank held rates steady, the New Zealand dollar was likely to rise sharply from its current level of about US71.6c to US75c as offshore investors anticipating a rate cut left the market, Mr Shareef said.

If the bank indicated rate cuts of 0.5% over the coming year or two, the dollar would still go up, but not as far.

If rates were cut on Thursday, there would be a knee jerk collapse in the dollar.

The BNZ remained open to the prospect of rate cuts by the end of the year should conditions deteriorate. But based on forecasts on how the economy performed over the coming year, the bank was ''formally forecasting'' no change to the OCR. The year end forecast for the dollar was US70c, he said.

ASB chief economist Nick Tuffley said the Reserve Bank was likely to ''explicitly forecast'' a fall in interest rates when it released its MPS on Thursday.

He expected the central bank to cut the OCR by 0.25% in September and October, taking it down to 3%.

Wage pressures were likely to remain more subdued than the Reserve Bank had anticipated, he said.

A combination of strong migration and high levels of labour force participation meant the pool of available works had been growing faster than the Reserve Bank had assumed.

Dairy prices had weakened slightly further and Fonterra's opening forecast for the new season was likely to reinforce dairy farmers' spending restraint.

Business confidence had also taken a tumble recently, Mr Tuffley said.

It was quite possible the Reserve Bank would ''bite the bullet'' and cut the OCR on Thursday, which the ASB put as a 40% chance.

''In our view, for that to happen requires some sort of 'Wheeler factor', such as a step back and look at the big picture of where the low recent and future inflation outcomes sit against the medium term aspect of the inflation target.''


At a glance

• 50-50 chance of official cash rate being cut on Thursday
• Reserve Bank likely to forecast interest rates fall in its Monetary Policy Statement
• Poor performing dollar will react no matter what happens
• Recent fall in business confidence raises concerns for growth outlook


 

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