As yield allure lifts New Zealand dollar, central bank could be forced to ease again this month

A resurgent New Zealand dollar is making life harder for the nation's central bank, putting more pressure on the South Pacific island's vital dairy exports and raising the chance of another interest rate cut as early as this month. Nicknamed the Kiwi after New Zealand's iconic flightless bird, the local currency has nevertheless flown sky-high since the US Federal Reserve last month backed away from a more aggressive path for interest rate rises.
It scaled a 10-month peak at $0.6968 last week, and is currently sitting at $0.6815 - a good distance from the year's low at $0.6348 reached on January 20 - as yield-hungry investors continue to plough funds into New Zealand dollar-denominated assets amid low rates in Japan, Europe and even the United States. On a trade-weighted index basis the Kiwi is around 3 percent higher than the central bank forecast it would be in the June quarter.
"It seems nothing can get the Kiwi down," said ANZ bank economists in a note to clients. That might force the Reserve Bank of New Zealand to ease policy at the April 28 meeting, after it surprised financial markets last month by cutting the cash rate a quarter percentage point to 2.25 percent. The RBNZ is striving to reignite an economy hit by a slump in prices for its key dairy exports, weakening global demand and low inflation. "An April (rate cut) is very much in play particularly if the NZD continues to hold up at current levels," said.
Stephen Toplis, head of research at BNZ whose base case is for the next rate cut to occur at the June policy review. The central bank has identified the dairy sector, with more than 85 percent of farmers currently grappling with losses, as a key risk to financial stability. Needless to say a strong currency is adding to the strains on the sector by eroding the value of export receipts. "It's a very real problem with current farm-gate returns leading to losses for a large proportion of the industry," said ANZ Rural Economist Con Williams. Moreover, in the short term, the high Kiwi threatens the central bank's inflation target because it suppresses the prices of imported goods.