NZ dollar falls ahead of RBNZ economic assessment

The New Zealand dollar fell ahead of the Reserve Bank's update on the economy this morning, where governor Graeme Wheeler is expected to flag an interest rate cut next month.

The kiwi dropped to 70.15 US cents at 8am in Wellington from 70.56 cents yesterday. The trade-weighted index declined to 75.33 from 75.68 yesterday.

The Reserve Bank will today issue a statement giving its view on the economy in an off-schedule announcement, which it said fills the gap between the June and August monetary policy statements.

News of the upcoming unexpected announcement prompted investors to speculate governor Graeme Wheeler wasn't happy with the strength of the kiwi and its deflationary effect, and the introduction new property lending restrictions earlier this week will make it easier for the Reserve Bank to cut the official cash rate next month. Traders are now pricing in an 83 percent chance of a reduction, up from 40 percent before the RBNZ said it would update the market.

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"Not only will the RBNZ have to all but confirm an August OCR cut, it will need to leave the door well and truly open to further easing beyond that, else risk a sharp reversal," ANZ Bank New Zealand economist Philip Borkin said in a note. "We're still not convinced the economy needs further easing, but acknowledge that it is on its way. But we also feel that it would take a meaningfully lower OCR (to well below 2 percent) to really alter what is still a solid backdrop for the NZD."

The kiwi fell to 63.69 euro cents from 64.04 cents yesterday ahead of the European Central Bank's policy review on Thursday in Brussels. Investors will be watching to see how the ECB respond to the UK vote to leave the European Union last month.

The local currency dropped to 53.16 British pence from 53.83 pence yesterday and edged up to 74.95 yen from 74.81 yen. It fell to 4.6852 Chinese yuan from 4.7156 yuan and declined to 93.85 Australian cents from 94.08 cents yesterday.