(Bloomberg) -- New Zealand’s dollar sank to the weakest level since August as a double whammy of bigger interest-rate cut bets in the nation and souring sentiment toward China weighed on the currency.
The kiwi slid as much as 0.7% to 60.4 US cents on Wednesday, making it the worst-performing currency among developed markets this month. Earlier in the session, New Zealand reported a sharp fall in the annual inflation rate for the third quarter, stoking bets that the Reserve Bank will be more aggressive in easing policy after delivering a half percentage point rate cut last week.
Weakening investor confidence toward China is also weighing on the kiwi given the nation’s status as New Zealand’s major trading partner. The yuan, an anchor for the regional foreign-exchange market, slid with mainland stocks this week as Beijing failed to impress investors with a strong fiscal stimulus plan to rejuvenate the economy.
The kiwi could fall below 60 US cents in the coming days as it’s weighed by rate differentials, said Imre Speizer, a strategist at Westpac Banking Corp in Auckland. Should the RBNZ accelerate rate cuts, kiwi is likely to fall below 59 US cents, he said.
The kiwi has fallen more than 4% so far this month, outpacing drops in all other Group-of-10 currencies.
New Zealand’s central bank is attempting to revive an economy that faces a second round of recession in less than two years after acknowledging its tight policy was weighing on activity. The RBNZ abruptly accelerated the pace of rate cuts in its latest meeting as unemployment rose to the highest in more than three years and house prices fell a seventh straight month.
Data Wednesday showed the nation’s annual inflation rate slowed to 2.2% in the third quarter and inside the RBNZ’s target band for the first time in more than three years. Traders briefly priced a more than 40% chance the central bank cuts its key rate by 75 basis points at the Nov. 27 meeting, according to data compiled by Bloomberg.
Meanwhile, traders have slashed bets for another half a percentage point cut by the Federal Reserve as the US economy remained surprisingly resilient. That means the kiwi is becoming less appealing relative to the dollar due to its narrowing yield advantage over the greenback.
To further dent confidence, a lack of strong and detailed fiscal stimulus from China has added doubts on the outlook of the world’s second-largest economy. A further slowdown can spill over to New Zealand as it’s a key exporter of consumer goods such as dairy products to China, according to Stats NZ data.
A 75-basis-point cut in New Zealand will become more vigorously debated as the market expects that “the RBNZ will take the wins that come its way, and aren’t afraid to be bold,” said David Croy, a rates strategist at ANZ Group Holdings Ltd. “Against the backdrop of US markets asking whether the Fed might ease more slowly, rather than more quickly, it’s also a downside risk to the kiwi.”
(Updates with context, commentary from fifth paragraph)
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