New Zealand Dollar to Drop 8% on Rate Cuts, CBA Europe Says

By Lukanyo Mnyanda

Nov. 4 (Bloomberg) -- The New Zealand dollar may drop 8 percent by April on speculation the central bank will cut interest rates, extending its longest losing run since the Asian financial crisis more than a decade ago, CBA Europe Ltd. said.

The Reserve Bank of New Zealand will probably lower its benchmark lending rate one percentage point by March to revive the economy, reducing the currency's yield as a slowing global economy boosts demand for U.S. dollars, according to Divyang Shah, chief strategist in London at CBA Europe, a unit of Commonwealth Bank of Australia. The currency may drop to 55 U.S. cents by the end of the first quarter, from 59.07 as of 11:42 a.m. in Auckland.

``There's further easing to come from the RBNZ,'' Shah said in a telephone interview today. ``Demand for safety and liquidity will continue to dominate and that should support the dollar and mean a weaker kiwi along the way,'' Shah said, referring to the currency by its nickname. The analyst's forecast is more bearish than the median prediction of 60 U.S. cents from 22 analysts and strategists surveyed by Bloomberg.

New Zealand's dollar fell against the U.S. currency in each of the past five months, its longest losing streak since 1997, as tumbling equity markets prompted investors to dump high-yielding assets for safer holdings in the U.S. and Japanese currencies. The kiwi slumped 23 percent this year against the dollar. It hasn't lost more than 20 percent since 1984.

The central bank, led by Governor Alan Bollard, reduced the main interest rate by 1.75 percentage points to 6.5 percent since July after the economy contracted in the first half. Policy makers will probably cut another half a point in early December, according to eight of 10 economists surveyed by Bloomberg. That may be followed by two cuts of 0.25 percentage point each by March, Shah said.

High-yielding currencies including the Kiwi, the Australian dollar and the South African rand dropped as concern the world economy is headed for recession slashed prices for commodities from gold to oil. Raw materials make up 70 percent of New Zealand's overseas shipments. The Baltic Dry Index, a measure of shipping costs for commodities, has slumped more than 90 percent since Jan. 2.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net