New Zealand Dollar May Decline as Yield Advantage Diminishes

By Tracy Withers

July 28 (Bloomberg) -- The New Zealand dollar may decline as the nation's high yield advantage diminishes on the outlook for slowing economic growth and more interest-rate cuts.

New Zealand's three-year swap rate is 3.29 percentage points more than the equivalent U.S. rate, from 3.48 points a week ago and as much as 5.55 points in March, according to Bloomberg data. The currency fell 5.2 percent against the U.S. dollar the past three months, the worst performing major currency against the U.S. dollar.

``Concerns about the slowing economy and looming interest rates cuts should continue to take a toll on the New Zealand dollar,' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``Further narrowing of interest rate differentials will likely undermine the local currency going forward.''

New Zealand's currency bought 74.27 U.S. cents at 9:10 a.m. in Wellington from 74.18 cents in late New York trading July 25. It bought 80.05 yen from 80.01 yen.

The currency fell 2 percent last week after Reserve Bank Governor Alan Bollard unexpectedly cut the official cash rate a quarter point to 8 percent, the first reduction in five years. Bollard, in a July 24 statement, said further rate cuts are likely unless there is ``excessive depreciation'' in the currency or a larger-than-expected surge in inflation.

The chance of a quarter-point cut at a review in September is 104 percent, suggesting it's a certainty, according to an index calculated by Credit Suisse based on swaps trading. All 15 economists surveyed by Bloomberg News expect a cut to 7.75 percent.

Bollard is cutting interest rates because the economy was probably in a recession in the first half of the year, and will recover only slowly in the remainder of the year, economists say.

``There is a risk that the domestic economy will slow further,'' he said in his statement. Weak growth will curb inflation over the next two years, he said.

A report today may show the trade deficit narrowed in the year ended June 30 as consumer demand for imports slowed, according to the median forecast of nine economists surveyed by Bloomberg News.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net