Kiwi falls despite RBA's rate cut

The cross rate rallied by about 40 basis points to A96.50c immediately following the RBA's decision to cut its official interest rate to 2 per cent from 2.25. Photo / NZ Herald

NZ dollar confounds expectations as markets price in perceived end to Australian central bank’s easing cycle.

New Zealand dollar parity with the Australian currency became less likely yesterday after the cross rate, contrary to expectations, fell in the wake of the Reserve Bank of Australia's decision to cut its official cash rate for second time this year.

The cross rate rallied by about 40 basis points to A96.50c immediately following the RBA's decision to cut its official interest rate to 2 per cent from 2.25, but fell to A95.50c shortly after.

At yesterday's level, the cross rate is well short of its A99.79c post float high, reached on April 4. ANZ Bank senior foreign exchange strategist Sam Tuck said market expectations were for a stronger cross rate to result from the RBA cut.

Instead, the currency eased based on market perceptions that the central bank had reached the end of its easing cycle.

"Markets were certainly biased towards kiwi-aussie rallying on the back of this cut, which was why we saw the instantaneous reaction, but upon reading the full statement from the RBA, markets became more focused on the interest rate outlook," Tuck said. There is now a 1.5 percentage point difference between New Zealand's official cash rate of 3.5 per cent and the Australian equivalent.

It is the second rate cut this year from the RBA as it seeks to soften the blow of a sharp decline in iron ore prices. The first was a 25 basis point cut to 2.25 per cent on February 4.

While the Reserve Bank of New Zealand is staying the course with its 3.5 per cent official cash rate, the NZ central bank has taken on an easing bias, which may also be weighing on the currency, Tuck said.

The kiwi was also under downward pressure from renewed strength in the US dollar, and expectations that the overnight GlobalDairyTrade auction will once again show falls in dairy prices.

The RBA said the economy looked likely to be operating with a degree of spare capacity for some time yet.

"Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate," the bank said.

The RBA said its board judged that the inflation outlook "provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand".

Governor Glenn Stevens said the Australian dollar had declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. "Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices," Stevens said.

HSBC chief economist Paul Bloxham said the currency movement reflected the different "biases" of the two central banks.

Bloxham said the RBA was quite upbeat about the state of the economy, and looked like it had reached the end of its easing cycle.

"It does look like the RBA is unlikely to deliver any more cuts in the near term while on the other hand the Reserve Bank of New Zealand has an easing bias."