New Zealand dollar slips as RBNZ seeks to suck up more bonds

[SYDNEY] The New Zealand dollar slipped to a one-month low on Wednesday after the country's central bank surprised many by expanding its bond buying campaign while warning it was actively considering cutting rates below zero to support the economy.

The Reserve Bank of New Zealand said it now planned to buy NZ$100 billion (S$90.2 billion) of government bonds, up from NZ$60 billion previously, and extended the deadline for purchases out to mid-2022.

If yet more action was needed, it preferred a combination of negative interest rates and a term funding package for banks to keep them lending to households and businesses.

The moves come as the country's largest city of Auckland goes into partial lockdown to fight a fresh outbreak of the coronavirus, the first in over 100 days.

"The RBNZ was clear that it believed further stimulus was needed," said Ben Udy, an economist at Capital Economics.

"We still expect the Bank to wait until next year before bringing the cash rate into negative territory, though the risk now is that the Bank moves sooner rather than later."

The kiwi dollar fell 0.4 per cent to US$0.6550 in response, but found solid support beneath US$0.6540. More chart support lies at US$0.6524 and US$0.6504. Bonds rallied, with 10-year yields falling 5 basis points to 0.755 per cent.

The Australian dollar hit its highest on the kiwi since late 2018 at NZ$1.0916, reflecting the fact the Reserve Bank of Australia (RBA) had only recently said it was on hold.

The Aussie fared less well on a broadly firmer US dollar, easing a touch to US$0.7120.

The economic news from Australia was disappointing with consumer confidence falling sharply in August as a lockdown in Melbourne shook sentiment across the country.

Official data also showed annual wage growth slowed to its lowest on record in the June quarter at just 1.8 per cent, underlining the weak outlook for incomes and spending power.

"One per cent of all jobs saw outright wage cuts with the average wage reduction being a severe 13 per cent," noted NAB economist Tapas Strickland.

"Annual growth is well below the post-inflation targeting average of 3.2 per cent and will weigh on inflation outcomes for some years."

Bond futures pared early losses on the news, but were still weighed by a sharp rise in Treasury yields overnight. The 10-year contract was off 4 ticks at 99.0700.

REUTERS