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Kiwi falls ahead of bank update

NZ NewswireNZ Newswire 20/07/2016 Paul McBeth

The New Zealand dollar has fallen ahead of the Reserve Bank's update on the economy, where governor Graeme Wheeler is expected to flag an interest rate cut next month.

The kiwi dropped to US70.15 US cents at 8am on Thursday in Wellington from US70.56c on Wednesday. The trade-weighted index declined to 75.33 from 75.68.

The Reserve Bank will on Thursday issue a statement giving its view on the economy in an off-schedule announcement, which it says fills the gap between the June and August monetary policy statements.

News of the upcoming unexpected announcement prompted investors to speculate governor Graeme Wheeler isn't happy with the strength of the kiwi and its deflationary effect, and the introduction new property lending restrictions earlier this week will make it easier for the Reserve Bank to cut the official cash rate next month.

Traders are now pricing in an 83 per cent chance of a reduction, up from 40 per cent before the RBNZ said it would update the market.

"Not only will the RBNZ have to all but confirm an August OCR cut, it will need to leave the door well and truly open to further easing beyond that, else risk a sharp reversal," ANZ economist Philip Borkin said in a note.

"We're still not convinced the economy needs further easing, but acknowledge that it is on its way. But we also feel that it would take a meaningfully lower OCR (to well below 2 per cent) to really alter what is still a solid backdrop for the NZD."

On Thursday morning, the kiwi fell to 63.69 euro cents from 64.04c ahead of the European Central Bank's policy review on Thursday in Brussels.

The local currency dropped to 53.16 British pence from 53.p and edged up to 74.95 yen from 74.81 yen. It fell to 4.6852 Chinese yuan from 4.7156 yuan and declined to 93.85 Australian cents from A94.08c.

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