Dollar touches fresh 3-year low, dips below 74 USc, ahead of RBNZ meeting

The New Zealand dollar touched a fresh three-year low as traders speculate that Reserve Bank governor Graeme Wheeler will remove the prospect of higher interest rates at Thursday's official cash rate review and may signal rates are headed lower.

The kiwi reached 73.94 US cents, its lowest level since November 2011 when it touched 73.67 cents. The local currency was trading at 74.03 US cents at 8am in Wellington, from 74.29 cents at 5pm yesterday. The trade-weighted index declined to 76.52 from 76.92 yesterday.

The New Zealand dollar has dropped 4.8 percent since the start of last week after traders dropped expectations for local interest rate rises and start to price in the possibility of cuts amid low inflation, declining commodity prices and concerns about weak global growth as other central banks cut rates. Traders have priced in 9 basis points of cuts over the coming year, signalling interest rates may be headed lower, according to the Overnight Index Swap curve.

"The tone of the Reserve Bank later in the week is going to be a little bit different and markets are starting to price it in," said Tim Kelleher, ASB Bank head of institutional FX sales in New Zealand. "You can't have Australia pricing in cuts, the Bank of Canada doing emergency cuts and New Zealand still talking about higher rates. Markets quite aggressively last week priced out any hikes and started pricing in cuts in New Zealand and we think that will be reflected in what the Reserve Bank says on Thursday."

The local currency is likely to remain weak until the RBNZ decision, he said.

The kiwi surged to 50.27 ruble from 47.41 ruble yesterday after Standard & Poor's downgraded Russia's investment rating to junk, putting it below investment grade for the first time in a decade, as the Russian economy teeters on the brink of recession after oil prices dropped to the lowest since 2009.

The New Zealand dollar fell to 93.40 Australian cents from 94.24 cents yesterday. Traders will be eyeing today's NAB monthly business survey for further signs of weakness in the Australian economy as they mull the prospect of interest rate cuts. The Reserve Bank of Australia meets next Tuesday.

Tonight in the US, investors will be eyeing the Richmond Fed, consumer confidence, housing releases and durable goods.

The kiwi weakened to 65.65 euro cents from 66.46 cents yesterday after Germany's IFO business confidence survey beat expectations. Economists say lower oil prices and the decline in the euro may be bolstering the outlook for the Eurozone's largest economy.

The local currency dropped to 49.02 British pence from 49.53 pence yesterday ahead of the release of UK fourth quarter gross domestic product, and advanced to 87.68 yen from 87.33 yen.

(BusinessDesk)