SYDNEY: The New Zealand dollar wallowed at a four-month trough on Thursday as investors rushed to price in more monetary policy easing there, pushing short-term market rates to their lowest since early 2022.
The policy outlook has shifted radically since the Reserve Bank of New Zealand flagged the need for even more stimulus after cutting rates to 3.0% on Wednesday.
Markets, and most economists, now see at least two more easings to 2.5% with the risk of deeper cuts should the economy not pick up as the RBNZ hopes.
Analysts at Citi expect rates to fall all the way to 2.0%, compared to 2.75% previously. "With GDP expected to contract in Q2, we now see risks of a double dip recession in NZ," said Citi economist Faraz Syed. "Thus we expect the MPC to cut by 25bps consecutively over the next four meetings."
The key two-year swap rate has already dived 18 basis points to 2.90% since the decision, promising to push down fixed mortgage rates in the process.
"The market's reaction was a thing of pure beauty," said Jarrod Kerr, head of economics at Kiwibank and a long-running dove on policy.
"A drop in the cash rate to 2.5% should see the 2-year swap rate on a glide-path to 2.8%," he added. "This is good news for indebted businesses and homeowning households."
Yields on 10-year bonds are down 11 basis points at 4.390%, compressing the spread over Treasuries to a thin 12 basis points and dragging down the local dollar.
The kiwi was pinned at $0.5818, having shed 1.2% the previous session in its biggest drop since the tariff-induced chaos of early April. The loss of support at $0.5847 opens the way to bear targets at $0.5800 and $0.5723.
The selling spilled over into the Australian dollar which hit a two-week low at $0.6423. Support stands at $0.6419, with resistance around $0.6450 and $0.6524.
The Aussie did make the most of the kiwi's woes by climbing to a five-month high of NZ$1.1067, and the next target is up at NZ$1.1173.
The Reserve Bank of Australia cut its rates to 3.60% earlier this month and markets are pricing two more reductions to 3.10% by March next year.
The next move is seen as unlikely until November following the release of inflation data for the third quarter. - Reuters
