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NZ dollar falls on speculation of easing

NZ NewswireNZ Newswire 19/07/2016 Jonathan Underhill
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The New Zealand dollar dropped and swap rates fell to record lows after the Reserve Bank announced plans to extend restrictions on mortgage lending, stoking speculation it may have room to cut interest rates twice in the next eight months.

The Kiwi fell to 70.27 US cents from 71.14 cents immediately before the RBNZ release and from 70.93 cents on Monday.

The two-year swap rate fell about 6.5 basis points to 2.05 per cent and has declined almost 80 basis points this year, according to Reuters data.

The RBNZ said it plans to extend mortgage lending restrictions on Auckland property investors to the rest of the country, making them more onerous by requiring a bigger deposit, and reintroducing a uniform national cap on highly leveraged owner-occupier mortgages.

The move wasn't a surprise, given deputy governor Grant Spencer flagged the potential for more stringent macroprudential tools two weeks ago, but the market was surprised that detailed plans were announced so soon and just two days ahead of an economic update by the RBNZ which is expected to include concerns that the Kiwi dollar is too high.

"The market is effectively pricing in two cuts now, out to early next year," said Philip Borkin, senior economist at ANZ Bank New Zealand.

Traders are pricing in 46 basis points of cuts to the official cash rate by March 2017, he said.

He said the strong Kiwi dollar, which limits any imported inflation and helps keep the inflation rate below the RBNZ's target range, looks to be one of its motivating factors.

"There's reasons for the NZ dollar to stay high - the New Zealand growth story still looks good, the fiscal position is good, some commodity prices have improved," he said.

The trade-weighted index fell to 75.23 from 75.74 on Monday - still well above the 71.6 quarterly average projected in the June monetary policy statement for the third quarter.

The Kiwi rose to 93.42 Australian cents from 93.35 cents. It dropped to 74.39 yen from 74.80 yen yesterday and slipped to 4.7087 Chinese yuan from 4.7488 yuan. It fell to 53.16 British pence from 53.57 pence yesterday and dropped to 63.46 euro cents from 64.08 cents.

The 10-year swap rate fell 8 basis points to 2.47 per cent.

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