NZ dollar falls after RBNZ cuts the OCR

The kiwi was trading at 65.89 US cents at 5pm. Photo / 123RF

The New Zealand dollar fell after the Reserve Bank's decision to cut its official cash rate to a record low after other central banks, notably the Federal Reserve and the Reserve Bank of Australia, decided to hold their key interest rates steady.

The kiwi was trading at 65.89 US cents at 5pm in Wellington, off the day's low at 65.25 in the seconds after the 2pm announcement of the rate cut, and from 66.01 cents at 8am. The trade-weighted index dropped to 71.90 points from 72.14.

The Reserve Bank's new Monetary Policy Committee said in its first OCR decision that "a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit."

It cut the OCR from 1.75 per cent where it has sat since November 2016 to 1.5 per cent.

"The market was short going into it," says Tim Kelleher, head of institutional foreign exchange sales at ASB Bank.

"The kiwi looks pretty fair value if you're an exporter," Kelleher says, adding that the 25-year average for the currency is 66.04 US cents and the 30-year average is 64.5.

"To go lower from here, it's going to require something big" such as a soaring US dollar.

One big question now is whether the OCR will go any lower and the market rates the chances of another OCR cut in August at about 50/50, he says.

The other major factor driving currency markets is the state of trade negotiations between China and the United States.

Kelleher says there's a rumour doing the rounds of a watered down deal being reached by Friday.

China's largest newspaper and the official paper of its Communist Party, the People's Daily, says China will remain calm against US President Donald Trump's threats of higher tariffs and has "complete confidence" in its ability to face challenges in the trade talks.

The domestic currency was trading at 93.79 Australian cents from 94.17, at 50.38 British pence from 50.49, at 58.78 euro cents from 58.98, at 72.44 Japanese yen from 72.82, and at 4.4602 Chinese yuan from 4.4739.

The New Zealand two-year swap rate sank to 1.5793 per cent from 1.6426 yesterday while the 10-year swap rate rose to 2.1550 per cent from 2.1400.