NZ dollar falls after weak Australian GDP data

The kiwi was trading at 67.61 US cents at 5pm. Photo / 123RF

The New Zealand dollar fell, dragged in the wake of the Australian dollar after fourth-quarter GDP across the Tasman came in weaker than expected.

The kiwi was trading at 67.61 US cents at 5pm in Wellington from 68.01 cents at 8am in Wellington. The trade-weighted index eased to 73.49 points from 73.76.

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The Australian dollar fell to its lowest level in more than two months after Australia's GDP came in at 0.2 per cent for the December quarter, lower even than downgraded expectations of 0.3 per cent and taking the annual growth rate to 2.3 per cent.

The New Zealand dollar didn't fall as much and gained ground to 96.12 Australian cents from 95.91.

Peter Cavanaugh, the senior advisor at Bancorp Treasury Services, says the make-up of the GDP report has traders worried there could be more of the same to come.

"It's put a spanner in the works of the Reserve Bank of Australia's thinking. The RBA's taken its eye off growth and has focused on the labour market, unemployment and wages growth," Cavanaugh says.

A day after noting "a welcome development" in some pick-up in wages growth, RBA governor Philip Lowe said in a speech today that there is "something deep and structural going on" in the labour market.

He said perceived competition from globalisation and technology was restraining pay rises businesses were prepared to give workers, despite Australia's low unemployment rate of 5 per cent.

Cavanaugh says "the Australian markets now believe the RBA is hanging its hat on the labour market and the feeling is that's quite vulnerable to what's going on."

Capping off the bad news, merchant bank JP Morgan came out with a prediction that the RBA will cut its official cash rate, currently 1.5 per cent, twice this year.

"We are changing our view on the RBA and now look for a 25 basis point rate cut in July, followed by a further 25bps easing in August," chief economist Sally Auld said.

The basis of that prediction was that GDP slowed sharply in the second half of 2018, lowering the starting point of the RBA's forecasts – currently, the RBA is forecasting Australia's economy will grow 3 per cent this year, a forecast it reiterated only yesterday.

"The growth outlook is being supported by rising business investment, higher levels of spending on public infrastructure and increased employment," the RBA said yesterday when it announced its decision to hold its OCR at 1.5 per cent.

Auld says another reason for the RBA not to be too tardy with its interest rate response is that core inflation is running at about 1.6 per cent, well below its mandated target of 2-3 per cent and "an uncomfortable starting point for a cyclical growth slowdown."

The New Zealand dollar was trading at 51.45 British pence from 51.62, at 59.85 euro cents from 60.14, at 75.53 yen from 76.07 and at 4.5410 Chinese yuan from 4.5608.

The two-year swap rate ended the day at 1.8230 per cent from 1.8400 and the 10-year was at 2.4450 per cent from 2.4780.