New Zealand dollar dives as RBNZ cuts rates, sees scope for more

By Wayne Cole

SYDNEY, Aug 20 (Reuters) - The New Zealand dollar slid to four-month lows on Wednesday after the country's central bank cut interest rates as expected but left the door wide open to yet more easing if needed, a dovish surprise that saw bonds rally sharply.

The Reserve Bank of New Zealand trimmed the official cash rate by a quarter point to a three-year low of 3.0%, bringing its easing cycle so far to 250 basis points in seven moves.

Yet policy makers said there was still scope to cut further and lowered their projected floor for the cash rate to 2.55%, from 2.85% forecast in May. Two members of the six-strong policy committee even voted to cut by 50 basis points on Wednesday.

"The fact that members gave serious consideration to an outsized 50bp cut is quite telling," said Abhijit Surya, a senior APAC economist at Capital economics.

"The main reason that the Committee feels the need to provide more policy support is its more downbeat outlook for the domestic economy," he noted. "The Bank made broad-based downgrades to its forecasts for GDP growth, the unemployment rate and private-sector wage growth."

Markets had been fully priced for Wednesday's easing and quickly moved to narrow the odds on two more cuts, implying a 50% chance of a move in October and over 100% for November.

The bottom is now implied around 2.57%, compared to 2.76% before the RBNZ announcement. 0#NZDIRPR

The sharp shift in outlook sent the kiwi dollar down 1.1% to $0.5830 NZD=D3, having already lost 0.5% overnight amid a general risk-off mood in global markets.

That broke support at $0.5847 and took it to ground last trod in mid-April, leaving it vulnerable to a further retreat to $0.5800.

Two-year swap rates NZDSM3NB2Y= dived 18 basis points to 2.91%, the lowest since early 2022. Yields on 10-year bonds NZ10YT=RR fell 8 basis points to 4.443%.

The Aussie eased 0.3% in sympathy to $0.6434 AUD=D3, after losing almost 0.6% overnight. A break of support at $0.6419 would risk a drop toward $0.6350.

The Aussie did, however, climb 0.7% on the kiwi to hit a five-month high at NZ$1.1030 AUDNZD=R.

The Reserve Bank of Australia (RBA) cut its cash rate to 3.60% earlier this month and left the door open to two or more easings should inflation continue to cool as expected.

Markets imply a 34% chance of another move in September, and are almost fully priced for a drop to 3.35% in November. Investors assume the floor for rates is likely to be 3.10%, with some chance of 2.85%. 0#AUDIRPR