RBC Sees Kiwi Tumbling as Drought Worsens Ahead of RBNZ Meeting

New Zealand’s dollar is poised to weaken as a worsening drought spurs the nation’s central bank to take a more dovish stance at tomorrow’s policy meeting, according to Royal Bank of Canada.

Reserve Bank of New Zealand Governor Graeme Wheeler will probably highlight that the overvalued kiwi dollar is preventing a rebalancing in the economy away from the domestic sector to the external sector, said Sue Trinh, RBC’s Hong Kong-based senior currency strategist.

“When a central bank is faced with a much higher exchange rate than it would like, its first point of defense is to jawbone, and the second is actually doing something about it,” Trinh said today. “There is already evidence they are doing smoothing at the margins.”

New Zealand’s dollar has climbed 2.5 percent in 2013 against a basket of 10 developed market currencies measured by Bloomberg Correlation-Weighted Indexes. That’s the third-biggest advance after the Swedish Krona and U.S. dollar. The kiwi traded at 82.52 U.S. cents as of 9:20 a.m. in London, down 0.2 percent from the previous close.

The dry weather is threatening production of milk and other agricultural commodities, and may reduce economic growth, Finance Minister Bill English told parliament this week.

RBC’s view contrasts with firms including Citibank Inc. and UBS AG predicting the RBNZ will use the meeting to signal a tightening in monetary policy. None of the 16 economists surveyed by Bloomberg News predicted the central bank will change its rate from the record low 2.5 percent tomorrow.

Wheeler speaking about the drought “does appear likely, but you have to balance that against developments like a more encouraging international backdrop and rising house prices,” Todd Elmer, the Singapore-based head of Group of 10 foreign-exchange strategy at Citigroup, said by telephone today. “Overall I expect a hawkish tone.”

Home Prices

Home prices in New Zealand rose in February at the fastest pace since March 2008, giving the central bank further reason to eventually raise interest rates, according to Geoffrey Yu, a senior currency strategist at UBS in London.

Westpac Banking Corp.’s Auckland-based strategist Imre Speizer said in a report today that Wheeler’s Monetary Policy Statement will likely repeat its “on hold” outlook for interest rates and that “housing could dominate the inevitable negative commentary on the high NZD and the drought.”

At the previous policy meeting on Feb. 20, Wheeler said the central bank was prepared to intervene to “smooth the peaks” in the “overvalued” kiwi. Interest-rate swaps data compiled by Bloomberg show traders see a 26 percent chance that the central bank will increase its rate by at least a quarter percentage point by its October meeting.

“The key thing is the interest-rate market is pricing in rate hikes too soon,” said RBC’s Trinh, who predicts the RBNZ will hold on rates for the rest of 2013. “Given current pricing, the risk is we see rate expectations get cut back sharply in one fell swoop.”

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