By Swati Pandey
SYDNEY, Aug 7 (Reuters) – The New Zealand dollar dived to a more than 3-1/2-year trough on Wednesday after the country’s central bank stunned investors with a larger-than-expected 50 basis-point rate cut, dragging its Australian cousin lower.
The kiwi dollar lost a sizable 2% to $0.6378, a level not seen since early 2016 and the largest one-day percentage drop since late March, after the Reserve Bank of New Zealand (RBNZ) cut the official cash rate (OCR) to an all-time low of 1%.
The next major chart support for the kiwi is $0.6348 while resistance lies around current levels.
The RBNZ cited low business confidence, a slowdown in economic growth and pressure from a protracted Sino-U.S. trade war for its hefty OCR cut.
It also projected a 1-in-3 chance of a 25 bps cut by year-end which would take the OCR to below 1%.
The dovish outlook triggered a surge in New Zealand government bonds, sending yields about 17 basis points down in the short-end and 13 basis points lower at the long end of the curve. The 10-year yields dived 18 basis points to 1.15%, marking its biggest daily fall since mid-2016.
Westpac Banking Corp is predicting the next RBNZ cut in November.
“Given the committee’s clear willingness to reduce the OCR, and our view that there is some further economic softness to come in the near term, we now expect another 25 bp cut in November,” Westpac’s economics team wrote to clients.
ASB Bank, the NZ arm of Commonwealth Bank of Australia , is also expecting a November rate cut.
“Even after the surprise size of the August cut, the risks remain skewed to an even lower trough than the current 1% OCR,” said Nick Tuffley, chief economist at ASB Bank.
“Global risks are moving relatively quickly,” Tuffley noted referring to the latest abrupt escalation in the Sino-U.S. tariff spat.
“Domestically, there may be more labour market slack than is evident by purely the low unemployment rate â€“ and with that the scope to drive the economy, employment and inflation pressures harder.”
Data out on Tuesday showed New Zealand’s unemployment rate fell to an 11-year low of 3.9% in the June quarter which had led some investors to dial back expectations for policy easing by the RBNZ.
The kiwi’s walloping dragged its Australian cousin lower, as the large RBNZ rate cut puts pressure on the Reserve Bank of Australia (RBA) to go again after it reduced its benchmark rate to 1% in July.
The Aussie dollar skidded 1.1% to $0.6677, a level not seen since early 2009.
Inter-bank futures are pricing in a more than 60% chance of an RBA rate cut in September while the cash rate is seen below 0.5% early next year.
Australian government bond futures rallied, with the three-year bond contract up 6 ticks at 99.38. The 10-year contract rose 7.5 ticks to 99.03. (Editing by Shri Navaratnam)