Dollar falls as investors mull lower rates after Canadian cut; ECB looms

The New Zealand dollar dropped to a two-and-a-half year low as investors speculate the central bank may have to lower interest rates after the Bank of Canada surprised markets with a rate cut yesterday, and ahead of Europe's anticipated money printing programme.

The kiwi fell as low as 75.18 US cents, the lowest level since June 2012, and was trading at 75.25 cents at 5pm in Wellington from 75.66 cents at 8am and 76.58 cents yesterday. The trade-weighted index dropped to 77.08 from 78.15 yesterday.

Traders are pricing in 10 basis points of cuts to New Zealand's 3.5 percent official cash rate in the coming 12 months after Canada's central bank joined the growing number of monetary authorities moving to lower rates. That's heightened expectations Australia and New Zealand will need to follow as investors gear up for the European Central Bank's policy review today in Brussels, where the regulator is expected to unveil a major quantitative easing programme to help revive a sluggish regional economy.

"The Bank of Canada was obviously quite shocking, and puts the notion in people's minds that we may be about to witness the capitulation on the part of other central banks towards an easing bias," said Raiko Shareef, currency strategist at Bank of New Zealand in Wellington. "The pressure is on the kiwi and Aussie."

New Zealand interest rates fell in response to the Bank of Canada's quarter-point cut to its key rate to 0.75 percent, with shorter-dated rates dropping at a faster pace. The two-year swap rate fell to 3.61 at 5pm in Wellington from 3.65 yesterday, while the 10-year swap declined to 3.74 from 3.7675.

Upbeat local data today failed to support the kiwi, with manufacturing activity at a decade-high in December and consumer confidence remaining above its 10-year average this month.

BNZ's Shareef said the ECB decision will likely take a while for the market to digest, with the initial announcement followed by president Mario Draghi's press conference, and then greater investigation of the detail of the programme by investors after that.

The kiwi dropped to 64.87 euro cents at 5pm in Wellington from 66.19 cents yesterday, and declined to 49.70 British pence from 50.48 pence.

The local currency fell to 89.04 yen from 90.15 yen yesterday, and declined to 4.6740 Chinese yuan from 4.7609 yuan. It was little changed at 93.27 Australian cents from 93.28 cents yesterday.

(BusinessDesk)