Kiwi Drops Versus Peers as Drought Worsens Ahead of RBNZ Meeting

New Zealand’s dollar dropped against most of its major peers on speculation the nation’s worsening drought will weigh on the economy and back the case for the central bank to keep interest rates at a record low.

The so-called kiwi touched its weakest level in six weeks against Australia’s dollar after a private report showed consumer confidence in the larger nation rose to a more than two-year high. Official data from New Zealand showed food prices declined last month, as the nation’s Reserve Bank prepares to hold a meeting on monetary policy tomorrow.

“The drought continues to worsen on an almost daily basis, placing downward pressure on the New Zealand dollar,” said Mike Jones, a currency strategist at Bank of New Zealand in Wellington. “There’s no doubt that growth in the first half of this year will be weaker as a result of the drought.”

New Zealand’s dollar declined 0.2 percent to 82.51 U.S. cents at 4:53 p.m. in Sydney. It dropped 0.6 percent to 78.96 yen. Against its Australian counterpart, it touched NZ$1.2535, the weakest since Jan. 30, before trading at NZ$1.2501, down 0.1 percent.

The Aussie slid 0.1 percent to $1.0315, following a 0.9 percent gain over the past two days. I declined 0.5 percent to 98.72 yen.

New Zealand Finance Minister Bill English said yesterday the dry weather could hurt economic growth. Drought declarations were extended to most of North Island last week, including the nation’s biggest milk-producing region. Food prices fell 0.3 percent last month after increasing 1.9 percent in January, official data showed today.

RBNZ Meeting

The drought could delay interest-rate increases from the central bank as it drags on the economy, Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in a research note today.

The RBNZ will keep its benchmark borrowing cost unchanged at 2.5 percent, according to every economist in a Bloomberg News survey. New Zealand’s two-year swap rate, a fixed payment made to receive a flowing rate, fell one basis point, or 0.01 percentage point, to 2.96 percent.

RBNZ Governor Graeme Wheeler will repeat his concern over what he called “the overvalued New Zealand dollar,” according to a note today by Westpac Banking Corp. senior currency strategist Sean Callow in Sydney.

In Australia, consumer confidence rose to the highest since December 2010, according to a survey from Westpac and Melbourne Institute released today. A gauge of home loans fell 1.5 percent in January, compared with a revised drop of 2.1 percent for the previous month, government data showed.

RBA Policy

Interest-rate swaps data compiled by Bloomberg show traders see an 82 percent chance the Reserve Bank of Australia will keep the overnight cash rate target at 3 percent when policy makers next meet on April 2. That’s up from 75 percent odds a week ago.

“The economy in Australia has stabilized,” said Bank of New Zealand’s Jones. “The process of paring bets for RBA cuts is supportive of the Aussie. We changed our interest-rate call to two more interest-rate cuts instead of three this year. The risk is that it’s even less.”

Norway’s sovereign wealth fund, the world’s largest, increased its investment in Australia’s government debt fourfold in 2012. The 4.08 trillion kroner ($716 billion) Government Pension Fund Global held 18.1 billion kroner of Australian federal government securities as of Dec. 31, according to a report released on March 8, up from 4.11 billion kroner a year earlier.

Australia’s 10-year bond yield slipped four basis points to 3.58 percent, after climbing to as high as 3.64 percent yesterday, the most since May 2.

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