The Impact of Expected Interest Rate Cut for New Zealand Dollar

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The New Zealand dollar has been among the strongest currencies in the past year – a rise that kiwis could attribute to a growing economy. But those days of strong currency performance could be drawing to a close as leading indicators suggest economic weakness. Recent declines in the kiwi currency track with a higher than expected unemployment rate and wage gains that fell short of projections, Pound Sterling Live reported. These latest developments in forex news stand in contrast to the beginning of 2015, which forecast a strong year for the New Zealand dollar.

The kiwi has been a favorite currency of those who practice “carry trade,” Boris Schlossberg of BK Asset Management explains. In carry trade, currency traders borrow money in low-interest rate currencies, such as the Yen, Euro, and the Pound, and transfer it to higher interest rate regions, such as the Australian and New Zealand dollars, in order to gain a higher return. This interest rate advantage has been one of the driver of the kiwi’s strong performance in the past year.

But some financial industry observers are now expecting the Reserve Bank of New Zealand to cut interest rates, perhaps twice in 2015. RBNZ Governor Graeme Wheeler has said that in his view, the kiwi is overvalued, which hurts domestic growth. The weaker economic data and low dairy auction prices suggest that an interest rate cut is coming.

Despite the forecast for declines in the kiwi, some New Zealanders could be in a position to claim positive outcomes to an interest rate cut. Exporters will benefit from the weaker New Zealand dollar as their good become less expensive relative to other global products.

Pound Sterling Live says that cut could come as soon as the RBNZ’s June policy meeting. A second cut could later follow to reinforce the new monetary policy.