New Zealand dollar drops after central bank says weakness is ‘needed’

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Talking down the currency.

New Zealand’s central bank has triggered a downward lurch for the country’s currency after policymakers said a weaker exchange rate was “needed” to help stoke inflation.

In its latest monthly decision – where policymakers kept rates unchanged – the Reserve Bank of New Zealand said “the exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector.”

“A decline in the exchange rate is needed”, it added.

That’s helped the kiwi fall more than 1.3 per cent against the US dollar since the decision (at 20.00 GMT) to $0.7209 – matching the biggest one day decline since November.

The Kiwi has strengthened around 10 per cent over the last 12 months, with the central bank’s latest projections showing a downgrade to the inflation trajectory and no expected rate hikes until 2019.

Still, the fight against a stronger exchange rate is not yet done, according to analysts at Commerzbank.

“Contrary to the RBNZ’s wishes it remains attractive”, said Antje Praefcke at German bank, who does not expect the current bout of currency weakness to last long.

Paul Dales at Capital Economics is more sanguine:

The RBNZ won’t want to repeat the mistakes of 2010 and 2014 when it raised rates too soon and had to cut them again shortly afterwards.

Overall, the financial markets may need to adjust their view that rates will be raised by 0.25% at least once this year and twice next year. That should help weaken the dollar from US$0.72 to US$0.60.

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