NZ dollar falls ahead of RBNZ rates review

The NZ dollar has dropped in anticipation of the likelihood of the RBNZ's Adrian Orr to keep the Official Cash Rate at 1.75 per cent. Photo/123RF.

The New Zealand dollar fell ahead of the Reserve Bank's policy review which is expected to keep the door open for a rate cut despite strong economic growth and recovering business confidence.

The kiwi traded at 66.50 US cents at 8am in Wellington from 66.70 cents yesterday. It briefly spiked to 66.90 cents after the Federal Reserve altered the wording of its statement in hiking the federal funds rate. The trade-weighted index was at 72.08 from 72.22 yesterday.

Governor Adrian Orr is expected to keep the official cash rate at 1.75 per cent at today's review. Recent data showed New Zealand's economy grew faster than expected in the second quarter, prompting traders to dial back their predictions for a rate cut, although Orr is likely to keep the door open to a lower rate.

New Zealand's review follows the Federal Open Market Committee meeting, where central bankers raised the federal funds rate to a range of 2-to-2.25 per cent. The Fed's statement stopped calling policy accommodative, which initially stumped traders. Fed chair Jerome Powell said the change didn't affect the interest rate path.

"While the FOMC kept its 'dots' unchanged, the removal of 'accommodative' in describing the policy stance was perceived as mildly dovish, weighing on the USD," ANZ Bank New Zealand economists Miles Workman and Philip Borkin said in a note. "Focus now turns to the RBNZ, where we are expecting a repeat of its cautious stance. The NZD faces competing tensions here, but believe resistance should hold for now."

Trade tensions also featured at the United Nations overnight where US President Donald Trump accused China of attempting to interfere with the upcoming midterm elections. The stoush between the nations has weighed on the currencies of New Zealand and Australian, both of which count China as their biggest trading partner. The kiwi traded at 91.62 Australian cents from 91.72 cents yesterday and declined to 4.5741 Chinese yuan from 4.5826 yuan.

The local currency was little changed at 50.52 British pence from 50.61 pence yesterday and traded at 56.67 euro cents from 56.61 cents. It fell to 74.96 yen from 75.29 yen.

ASB chief economist Nick Tuffley said he expected the bank to keep rates on hold and to eventually lift it early in 2020.

"However, the risks through to mid-2019 are tilted to a lower OCR due to low levels of business confidence," he said in a commentary.

"Although the Reserve Bank will have been pleasantly surprised by the strength of Q2 GDP, continued soggy business confidence will keep it wary about the growth performance for the rest of 2018 – particularly the tail end of the year," Tuffley said.

- BusinessDesk