Reuters New Zealand
NZ dollar tumbles on interest rate cut, bonds gain
Thursday July 24, 05:17 PM
WELLINGTON, July 24 (Reuters) - The New Zealand dollar NZD= fell 1 percent to a six-month low on Thursday after the central bank cut interest rates, and flagged more easing to come to cushion an economy which may already be in a recession.
The quarter percentage point cut to 8.0 percent had been viewed by the market as a close call, but the kiwi still tumbled close to a cent, to a low of $0.7410 NZD=D4, before recovering some of its losses.
"The statement was dovish. It suggested this is the start of the big easing cycle everyone has been waiting for, and that really has weighed on the kiwi," said BNZ currency strategist Danica Hampton.
The kiwi was at $0.7420/30 at 0500 GMT, from $0.7550/53 in late local trade on Wednesday, and about $0.75 prior to the rate decision.
Reserve Bank of New Zealand governor Alan Bollard said in a statement explaining the move that the economy would remain weak throughout this year before gradually recovering in 2009.
Further rate cuts are likely, as long as the kiwi does not fall too sharply, Bollard said.
A Reuters poll taken after the decision showed all 17 analysts expected a further cut at the bank's next meeting on Sept. 11, with 13 of 17 forecasters expecting rates at 7.25 percent by the end of the year.
"There'll be a series of 25 basis point cuts until they think they've done enough, and that should extend into early next year," said UBS senior economist Robin Clements.
Underlining the negative sentiment on the kiwi is a heavy schedule of uridashi and eurokiwi bond redemption over the next few months, which could result in offshore investors repatriating gains made in New Zealand assets as yield returns decline.
Calculations by RBC Capital Markets show an average monthly redemption of NZ$1.5 billion until the end of 2008.
The kiwi fell to a near eight-year low against the Aussie dollar NZDAUD=R on differing interest rate outlooks, with Australian rates seen on hold for some time amid strong inflationary pressures.
Broad U.S. dollar strength didn't help the kiwi's cause. It gained within reach of a one-month high against the yen JPY= on lower oil prices and increasing confidence within the troubled U.S. financial sector.
New Zealand government debt rallied on the rate cut, with yields falling up to 10 basis points, before retreating. In late trade the yield on the benchmark NZ 10-year government bond NZ10YT=RR was 5 basis points lower at 6.13 percent. (Reporting by Adrian Bathgate; Editing by James Thornhill)
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