Strong New Zealand Dollar becomes market focus


The strong New Zealand dollar is going to be a focus for local markets this week.

The dollar was trading at 71.14 US cents, 93.8 Australian cents and 53.95 pence at 6am on Monday.

The strong Kiwi is making life tough for exporters and it is higher than the Reserve Bank (RBNZ) expected.

The Kiwi has lost some ground since the RBNZ announced last week that it would be issuing a special economic update on Thursday of this week.

The RBNZ made clear it will not be making an announcement on interest rates. Nor is it expected to unveil any changes to its rules for property loans.

The RBNZ says the update was being issued because a change in timetable means there will not be issuing its next Monetary Policy Statement until the 11th of August.

For the RBNZ to issue a special economic update, it suggests something has changed about its view of the economy.

The reaction of the markets was immediate.

Traders speculated that the RBNZ was going to say something about the stubbornly high dollar. Perhaps it was going to signal that the odds had increased of an interest rate cut next month to dampen the Kiwi?

The prospect of this happening was enough for some traders to sell the Kiwi.

That selloff meant the Kiwi actually fell 2.60 percent in value against the US dollar last week.  It was down by 2.53 percent against the Australian dollar and slumped by 4.29 percent against the Pound (helped by the Bank of England opting not to cut its key lending rate).

The Reserve Bank would view the fall in the currency as a good start. But it will want to see the currency fall much further.

Not only is the dollar too high, but inflation is weaker than the RBNZ wants.

The latest Consumer Price Index, out on Monday is expected to show inflation running at 0.5 percent. That is well below the RBNZ's target range of between one and three percent.

Normally a high dollar and weak inflation would warrant an interest rate cut. But any cut to the OCR risks fuelling the already hot property market.

Craigs Investment Partners' Mark Lister says the market is now pricing in a 70 percent chance of a rate cut next month.

It was closer to forty percent a couple of weeks ago.

Mr Lister says "In the June Monetary Policy Statement one of the scenarios presented by the RBNZ was that of a persistently high currency, in which the RBNZ cut the OCR to below one percent in response. Nobody is expecting that sort of action to be taken, although this does suggest that further commentary on the currency is highly likely."


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