The New Zealand dollar edged higher today and the debt market rallied after the Reserve Bank signalled interest rate cuts are on the horizon.
The Reserve Bank kept the Official Cash Rate steady at 5.75 per cent for the sixth straight month - as expected - saying the domestic economy was still running at a healthy clip.
But in a doveish accompanying statement, the bank said that if the exchange rate remains around present levels or appreciates further there may be scope for a rate cut later in the year.
A higher kiwi should ease inflation, currently hovering dangerously close to the top of the Reserve Bank's 0-3 per cent target band, by lowering the cost of imports and reducing exporters' returns.
Economists read into today's statement that there could be a quarter point cut as soon as June - a prediction which was quickly priced in on the local debt market.
Government bonds closed up to eight basis points lower in yield, with the April 2004s at 5.53 per cent (5.59 at yesterday's close), the November 2006s at 5.66 per cent (5.74), the November 2011s at 5.94 per cent (6.02), and the April 2013s at 5.97 per cent (6.05).
The New Zealand dollar clawed higher to US54.45c after being sold off overnight as dealers unwound speculative long positions following the recent rally. That compares with an intraday low of US54.03c and yesterday's close of US54.78c.
Profit-taking also put the Australian dollar under pressure. It closed locally at US58.70c (US58.97c late yesterday). On the trans-Tasman cross, the kiwi eased to A92.77c from last night's close of A92.93c.
The kiwi has been one of the best performing currencies in the world in the past year, climbing 27 per cent against the US dollar.
BNZ currency strategist Stu Ritson said the kiwi was vulnerable to further downside in the short-term, however, and a move towards the mid-US53cs was possible as profit-taking took hold.
The Reserve Bank's easier stance could take some of the gloss off the kiwi's rally, which has been driven largely by the gaping interest rate differential between here and the United States - where key interest rates are at 1.25 per cent, Mr Ritson said. But this would only be at the margin.
More insight into Reserve Bank Governor Allan Bollard's thinking will come tomorrow when he delivers a speech entitled "Making Sense of a Rising Exchange Rate".
At 5pm New Zealand's trade-weighted index, which measures the kiwi against the currencies of New Zealand's five main trading partners, was at 60.12 (60.36), 90-day bank bills were at 5.81 per cent (5.84), and the monetary conditions index was at plus 138 (plus 161).
The kiwi eased against other major currencies, buying 0.5082 euro (0.5104), 64.67 yen (64.71), 33.66 pence (33.87), and 0.7437 Swiss francs (0.7459).
The Australian dollar was at $NZ1.0780 ($NZ1.0765).
- NZPA
<i>Currency:</i> Kiwi recovers and debt rallies as cash rate unchanged
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