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NZ dollar falls as RBNZ survey shows softer inflation expectations; Yellen looms

The New Zealand dollar fell after inflation expectations dwindled in the Reserve Bank's latest survey of local firms, who didn't expect the central bank to raise interest rates this year, and ahead of US Federal Reserve chair Janet Yellen's semi-annual testimony to legislators.

The kiwi dropped to 74.75 US cents at 5pm in Wellington from 75.20 cents at 8am, and 75.13 cents yesterday. The trade-weighted index declined to 77.69 from 77.92.

New Zealand firms see the consumers price index rising an annual 1.11 percent in the year ahead, down from the 1.59 percent rate seen three months ago, and have pared back their two-year ahead expectations to an annual pace of 1.8 percent from 2.06 percent, according to the Reserve Bank of New Zealand's survey of expectations. The survey comes after the Reserve Bank last month dropped its tightening bias and said inflation could turn negative before a more gradual return to within the bank's 1 percent-to-3 percent target band.

"It's a negligible to modest downside surprise - it's certainly not enough for the 'on hold' stance to go to an easing stance," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland. "If that's what the markets are expecting in currency land, they're over-reaching."

Speizer said if the kiwi is sold off further during the Northern Hemisphere session, that would spell the end of the recent bounce in the local currency.

Interest rate markets barely reacted to the RBNZ's survey, though Speizer said there may be a small increase in pricing for a chance of a rate cut. Traders are pricing in 14 basis points of cuts over the coming 12 months, according to the Overnight Index Swap curve.

New Zealand's two-year swap rate edged down to 3.58 at 5pm in Wellington from 3.585 yesterday, and the 10-year swap rate was unchanged at 3.82.

Traders have been waiting for Yellen's testimony on the US economy and monetary policy before the senate banking committee, which will be closely watched for any indications on the timing of an interest rate hike. Minutes to the last Federal Open Market Committee meeting showed the majority of its members were cautious about raising rates, though that decision was made before strong employment figures.

The local currency advanced to 96.18 Australian cents from 95.90 cents yesterday, and fell to 88.99 yen from 89.37 yen. It declined to 4.6747 Chinese yuan from 4.6991 yuan yesterday, and was little changed at 65.96 euro cents from 65.99 cents. The kiwi fell to 48.41 British pence from 48.85 pence yesterday.