Double whammy sends kiwi dollar sharply lower

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The New Zealand dollar dropped sharply yesterday after the Reserve Bank surprised some by keeping its official cash rate at 2.5 per cent.

While the prevailing view was that the bank would wait until March before firing its first monetary salvo in nearly three years, some participants had nevertheless priced in a 25-basis-point rate hike at yesterday's rate review.

When it didn't eventuate, the New Zealand dollar fell from US82.63c before the release to US81.82c soon after.

The kiwi initially recovered some ground to trade over US82c but by late in the trading day, it had dropped back to US81.80c.

Just before the Reserve Bank's release, the US Federal Reserve said it would push ahead with its plan to cut its monthly bond purchases by an additional US$10 billion ($12.2 billion) to US$65 billion because of a strengthening US economy.

BNZ market strategist Kymberly Martin said both the Fed's and the Reserve Bank's messages were well anticipated but she said the local market had nevertheless priced in a 35 per cent chance of a rate hike.

"There was a certain element of shock for those who were expecting a hike and the kiwi responded initially with a kneejerk decline," Martin said.

"But we think the kiwi has peaked and we don't expect it to get back above US86c," Martin said.

ANZ senior foreign exchange strategist Sam Tuck expects the kiwi to remain resilient in the early part of the year.

But like the BNZ, ANZ expects the exchange rate to drop in the second half. Tuck expects to see the currency at US80c for the end of the September quarter and US78c by the year's end.

HSBC remains bullish on the kiwi. It expects the currency to power ahead to US87c this year, rising to US88c in 2015.