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NZ dollar still under pressure, Aussie slips on rate cut talk

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The New Zealand dollar lost altitude for a sixth straight session on Wednesday as speculation about a rate cut as early as August hit fever pitch a day before the country's central bank issues an economic update.

[SYDNEY] The New Zealand dollar lost altitude for a sixth straight session on Wednesday as speculation about a rate cut as early as August hit fever pitch a day before the country's central bank issues an economic update.

The kiwi dollar, which shed two-and-a-half US cents in the past week, fell another 0.2 per cent to US$0.7040 before recovering a bit. Its Australian counterpart has surged 3 per cent on the kiwi since coming near to parity early this month .

The Reserve Bank of New Zealand added fuel to the fire on Tuesday by proposing new restrictions on mortgage lending to try to cool red-hot house prices.

"With new steps under way to deal with booming house prices, the market now sees a greater chance of interest rate cuts by the RBNZ," said Michael Gordon, an economist at Westpac.

"We were already firmly of the view that the RBNZ would cut again. The announcement on loans, and the hastily scheduled economic update on Thursday, only reinforce our view."

The central bank will release its update at 9 am Thursday local time, (2100 GMT Wednesday). The market will be watching for further clues about whether it might cut at a policy meeting on Aug 11.

The market is now pricing in an 80 per cent chance a rate cut by the RBNZ, according to BNZ senior market strategist Kymberly Martin. The central bank's benchmark interest rate is currently at 2.25 per cent and it is widely expected to cut to 2 per cent.

Speculation is also high that Reserve Bank of Australia (RBA) will cut its 1.75 per cent cash rate in August, with the futures market pricing in around a 60 per cent probability.

Much will depend on inflation figures for the second quarter due on July 27 where another soft result is likely.

"A weak inflation outcome would likely convince the RBA to lower rates again," said Janu Chan, a senior economist at St George Bank.

"We expect a cut of 25 basis points at its August meeting." That risk was keeping the Aussie dollar restrained at US$0.7498 and well off last week's top of US$0.7676.

In debt markets, New Zealand government bonds eased slightly sending yields up 1 basis point at the long end of the curve.

Australian government bond futures were unchanged, with the three-year bond contract at 98.550 and the 10-year contract at 98.0650.

REUTERS