NZD:The currency will decline to 70 cents

The New Zealand dollar is tanking faster than any other major currency as pressure mounts on Reserve Bank Governor Graeme Wheeler to cut interest rates for the first time since 2011 next week. The kiwi, as it’s known to traders, is the worst performer against the U.S. dollar this quarter among all its developed- nation counterparts, falling 4.4 percent. That’s a far cry from 2014, when it beat all of those peers as Wheeler boosted rates four times from March to July.

New Zealand’s economic outlook has soured as milk prices plunged to an almost six-year low while inflation all but vanished. In the past week alone, analysts have cut their year- end kiwi forecasts by 2 cents as speculation increases that the central bank will -- for the second time since the global financial crisis -- backtrack after tightening policy by cutting interest rates.

“Dairy incomes look like they’re going to be very constrained over the coming 12 to 24 months,” Raiko Shareef, a markets strategist at Bank of New Zealand Ltd. in Wellington, said in a telephone interview Wednesday. “We’ve been negative on kiwi for a long time, and we remain  negative.”

The currency, named for the image of the flightless bird on the NZ$1 coin, traded at 71.44 U.S. cents as of 11:43 a.m. in Tokyo. It dropped to 70.72 cents on June 1, the weakest since September 2010, from last year’s high of 88.36 cents in July.

Best Forecaster

The currency will decline to 70 cents by year-end and reach 65 cents by the close of 2016, according to Bank of New Zealand’s parent National Australia Bank Ltd., the top forecaster of the currency in the 12 months through March. That almost matches the median forecast of 40 analysts surveyed by Bloomberg is for it to end this year at 71 cents.

Swaps markets show a 58 percent chance the RBNZ will cut its cash rate target by a quarter point when it meets June 11, compared with a 21 percent probability on the day after its previous meeting on April 30, data compiled by Bloomberg show.

The currency tumbled 1.9 percent in the two days after the April decision, when the central bank said in its statement it would reduce rates if inflation pressures declined. For NAB’s local unit, the main scenario is for the RBNZ to keep borrowing costs unchanged this year, though a reduction in

September or later is possible. “It’s a pretty finely balanced call,” Bank of New Zealand’s Shareef said.

Milk Glut

The price of milk -- far and away New Zealand’s biggest export earner -- has plunged about 35 percent in the past 12 months amid a global glut. It hasn’t yet bottomed, according to Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland.

“The market will stay with the theme of pricing in interest-rate cuts sometime this year,” he said in a phone interview Wednesday, pointing out that Westpac forecasts no change from the RBNZ next week. “The New Zealand dollar is still in decline.”

The kiwi will probably weaken to 69.50 cents in the next two months, Speizer said. Farmer incomes will shrink by more than NZ$6 billion ($4.3

billion) as a result of the drop in milk prices, according to economists at ANZ Bank New Zealand Ltd. That should prompt the Reserve Bank to cut rates in June, they wrote in an e-mailed note last month. While interest-rate swaps signal the Reserve Bank will reduce borrowing costs next week, the majority of economists see no change to policy. Until this week, HSBC Holdings Plc was also predicting rates will stay on hold.

The London-based bank changed its call to a quarter-point reduction in June, followed by another at year-end, from a previous forecast of no easing at all in 2015. Among the key reasons for the switch are government policies to help slow rising housing prices and the decline in milk.

“The change in sentiment in the market has really put kiwi under pressure,” said David Bloom, global head of currency strategy at HSBC in London, who sees the currency weakening to 70 cents at year-end. “For once in our lives, macroeconomics is making complete sense.”