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Kiwi too high, rate cut likely: RBNZ

NZN 20/07/2016 By Paul McBeth

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

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

The Kiwi fell to 69.67 US cents from 70.18 cents 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 per cent.

"The governor delivered a pretty clear dovish statement this morning which is really giving things a good nudge," said Mark Johnson, senior dealer foreign exchange at OMF in Wellington.

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

Mr Johnson said the Kiwi has broken through two important levels - 70.50 US cents and 69.90 cents - 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.

Also in a world where rates are near zero, New Zealand assets offer better returns, stoking demand for the currency.

The announcement of 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 economic Philip Borkin said Thursday's RBNZ statement was 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 said.

"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 said that means if RBNZ 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.

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