Bollard May Spur New Zealand Dollar Gains by Snubbing Bets for Rate Cuts
New Zealand’s dollar, this year’s worst-performing major currency, is likely to rally if the central bank disappoints markets by failing to cut the benchmark interest rate, AMP Capital Investors said.
The so-called kiwi slid 5.2 percent this year against the dollar and reached an 18-year low against Australia’s currency after New Zealand’s deadliest earthquake in 80 years prompted bets Governor Alan Bollard will cut the official cash rate from 3 percent tomorrow. Swaps traders are wagering on a near certainty he will set the rate at 2.75 percent, with some chance of a reduction to 2.5 percent, according to a Credit Suisse AG index.
“Given market positioning and expectations for a cut, the risks are actually skewed toward a rally in the New Zealand dollar,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which manages about $93 billion. “If they just move to an easing bias and don’t actually cut then that would be quite positive for the New Zealand dollar.”
New Zealand’s dollar traded at 73.96 U.S. cents as of 11:35 a.m. in Wellington. That’s down from the 79.76 cents it reached on Nov. 4, which was the highest level since April 2008. It traded at NZ$1.3652 against the Australian dollar after reaching NZ$1.3796 on March 7, the weakest since June 1992.
The government said March 6 it may need to borrow more money and reconsider spending plans after the Feb. 22 earthquake caused as much as NZ$15 billion ($11 billion) in damage. The death toll from the quake totals 166, the most since a 1931 temblor.
‘Virtually No Growth’
Prime Minister John Key said March 2 that he expects the Reserve Bank of New Zealand to reduce rates. A recession in the first half of 2011 cannot be ruled out, he said, and there’s likely to be “virtually no growth” recorded for the financial year through June.
Bollard may choose to tolerate the near-term decline in growth and keep rates unchanged, said Paul Bloxham, chief economist at HSBC Holdings Plc in Sydney. With rising price pressures globally, a currency weakened by a rate cut could push domestic inflation higher, he said in a research note this week.
Six of 15 economists surveyed by Bloomberg News forecast the RBNZ will cut rates to 2.50 percent from 3 percent. Four predict a 25-basis-point reduction and five expect no change.
AMP’s Oliver said the central bank may be more likely to respond initially by signaling a bias toward more accommodative monetary policy rather than cutting rates.
“Historically natural disasters tend to have little impact on the medium-term outlook for an economy on a one-year view,” as reconstruction makes up for lost economic activity, he said.
New Zealand’s recovery is also being bolstered by surging prices for exports, which make up 30 percent of the economy. The value of commodity shipments rose for a sixth month to a record in February, led by hides, milk powder and timber, ANZ National Bank Ltd. said in a monthly report on March 1.
Whole milk powder prices climbed to a record at the latest auction, Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said March 2. Milk prices will likely remain at least 50 percent above historical averages in the longer term, Chief Executive Officer Andrew Ferrier said Feb. 14.
“There’s a chance of a 50-basis-point confidence cut but there’s also a chance that they do nothing,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s largest lender. The Australian dollar’s rally against the kiwi is likely to peak tomorrow whatever Bollard decides, he said.
Grace recommends buying New Zealand’s currency versus the Australian dollar targeting a rise to NZ$1.30 by year-end. Declines in the kiwi below 73 U.S. cents may also be a buying opportunity, he said, as the currency will advance to 75 cents by June.
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