NZ dollar falls after Fed suggests no negative interest rates

Federal Reserve chair Jerome Powell. Photo / AP

The New Zealand dollar sank even further after the Federal Reserve suggested it doesn't plan to use negative interest rates which followed NZ's Reserve Bank leaving the door open to negative rates yesterday.

The kiwi was trading at 59.81 US cents at 5.30pm in Wellington from 60.11 cents at 5pm yesterday. The trade-weighted index was at 67.83 from 68.01 yesterday.

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Fed chair Jerome Powell made clear he expects the US economic recovery will be U-shaped, not the V-shape markets have been betting on, and that congress and the White House should act further to prevent long-lasting damage to the economy.

Avoidable household and business insolvencies would weigh on growth for years if the US government didn't provide more financial assistance, Powell said.

While the Fed would "continue to use our tools to their fullest" to help cushion the US economy, Powell repeated previous warnings that although the Fed can lend money to solvent companies through the crisis, a longer downturn could threaten to bankrupt previously healthy companies in the absence of more government assistance.

"The Fed basically has handed the baton back to congress," said Pat Gilligan, a director at Forex.

"That hit stocks because the market thought maybe the Fed hasn't got another bazooka to go," Gilligan said.

Yesterday, the RBNZ said it continues to talk with financial institutions about preparing for a negative official cash rate but in the meantime doubled its money-printing programme to $60 billion.

The kiwi briefly fell as low as 59.72 US cents after employment data in Australia showed that economy lost 594,300 jobs in April, more than the 575,000 economists had predicted.

The Australian Bureau of Statistics said 2.7 million people either lost their jobs or had their hours reduced and that nearly 500,000 people left the labour force.

Gilligan said the New Zealand government's budget, which included $50b in new spending on top of the $12b pledged in March to cushion the economy from the coronavirus crisis, had little impact on the currency. The combined spend is about 20 per cent of GDP.

"We all knew the numbers were going to be pretty big," he said.

Given today's events, and the fact that the US market fell for second successive session overnight, the kiwi could fall further in offshore trading tonight, Gilligan said.

The New Zealand dollar was trading at 92.97 Australian cents at 5.30pm from 92.82 cents at 5pm yesterday. It was at 49 British pence from 48.99 pence, at 55.33 euro cents from 55.39 cents, at 63.90 yen from 64.42 yen and at 4.2443 Chinese yuan from 4.2616 yuan.

The bid price on the two-year swap rate closed at 0.1030 per cent from 0.0800 per cent yesterday while 10-year swaps were at 0.6250 per cent from 0.5800 per cent.