NZ dollar hits 2-yr low as signs of Chinese currency management knock already weak kiwi

The kiwi fell to 92.52 Australian cents from 92.72 cents yesterday. Photo: Lynn Grieveson

The New Zealand dollar dropped to a two-year low as growings signs China will manage its currency as part of a package to manage slowing growth added to the kiwi's downbeat tone after yesterday's weak business confidence reading.

The local currency fell as low as 67.76 US cents, trading at 67.91 cents at 8am in Wellington from 68.50 cents yesterday. The trade-weighted index dropped to 72.73 from 73.07 yesterday.

The People's Bank of China published a weak reference rate for the yuan yesterday, which has seen the Chinese currency effectively devalued by 2 percent over the past six days, its biggest devaluation in almost three years. Chinese authorities are concerned about the slowing pace of growth in the world's second-biggest economy, and at the same time are contending with the prospect of a trade war with the US.

"As we mentioned earlier this week, the PBoC needs to be careful that it doesn’t spook the market and trigger resurgent capital outflows," Bank of New Zealand senior market strategist Jason Wong said in a note. "We see this as the most threatening source of risk to a weaker NZD."

The kiwi was already under pressure after yesterday's ANZ business outlook showed firms are increasingly pessimistic about the economic outlook and are losing confidence in their own activity. That comes ahead of today's Reserve Bank policy review, which is expected to keep the official cash rate at 1.75 percent, and investors will scour the one-page statement for any hint of a softer outlook.

Wong said the RBNZ review "should pass with little market reaction" with the first rate hike not fully priced into swaps markets until November next year.

The kiwi fell to 92.52 Australian cents from 92.72 cents yesterday and declined to 4.4815 Chinese yuan from 4.5051 yuan. It dropped to 74.86 yen from 75.42 yen yesterday and decreased to 58.76 euro cents from 58.85 cents. The kiwi traded at 51.76 British pence from 51.82 pence yesterday.