New Zealand’s dollar fell against its Australian counterpart from a five-year high after inflation expectations in the smaller nation topped out this quarter, damping the prospects for a rate increase.
New Zealand’s inflation-linked notes have lost an annualized 8.2 percent this year, set for the worst performance on record dating back to 1997, according to a Bank of America Merrill Lynch index. The yield on Australia’s benchmark three-year government note touched a two-week low after minutes of the Reserve Bank’s Nov. 5 meeting showed policy makers kept the option of reducing rates if needed.
Today’s data suggest that “maybe we are not in as inflationary an environment in New Zealand as what we thought,” said Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking Corp., Australia’s second-biggest lender by market value. Investors taking profit on short Aussie-kiwi positions has “probably been weighing on New Zealand dollar sentiment in the near term.”
New Zealand’s currency fell 0.3 percent to NZ$1.1280 per Aussie as of 5:29 p.m. in Sydney. The kiwi strengthened to as high as NZ$1.1198 yesterday, a level not seen since October 2008. It dropped 0.1 percent to 83.24 U.S. cents. The Australian dollar advanced 0.1 percent to 93.89 U.S. cents.
Inflation will average 2.34 percent in two years time, according to the fourth-quarter survey of business estimates published by the Reserve Bank of New Zealand today. Expectations fell from 2.36 percent in the previous three-month period, the highest since June 2012.
Australia’s three-year note yield fell to as low as 3.04 percent, a level unseen since Nov. 1, before closing at 3.08 percent, compared with 3.07 percent yesterday.
“Given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady while continuing to gauge the effects, but not to close off the possibility of reducing it further should that be appropriate,” the Reserve Bank of Australia said in the minutes released today.
There’s a 20 percent likelihood that the Reserve Bank of Australia will lower the benchmark rate from 2.5 percent in April, according to data on overnight-index swaps compiled by Bloomberg. Traders see an 83 percent chance that the RBNZ will raise the official cash rate in that month.
The Reserve Bank of New Zealand said on Oct. 31 that continued gains in the nation’s currency weaken inflationary pressure, giving the central bank greater flexibility as to the timing and degree of future increases in the benchmark rate from a record low of 2.5 percent.
“Next year, the RBNZ will hike rates in a sustainable manner,” Mansoor Mohi-uddin, the Singapore-based head of foreign exchange strategy at UBS AG, said in an Bloomberg Television interview. The RBA “may have to cut rates. That’s the risk there, and that’s why we like Aussie-kiwi still low from here.”