Asia stocks higher, NZ dollar surges after small rate cut

The Australian dollar, too, reacted to the Reserve Bank of Australia’s May cut by climbing rather than falling, as the market bet that it would not ease further.

“A reduction in the OCR is warranted by the softening in the economic outlook and low inflation”, Reserve Bank governor Graeme Wheeler said in a statement.

Headline inflation is now below the Bank’s 1 to 3 per cent target range, due largely to previous strength in the New Zealand dollar and a large decline in world oil prices. “We saw a mild increase in the easing bias by the RBA and that encouraged traders to keep pressure on the Aussie dollar”, said ANZ’s Sam Tuck.

RAILROADED: Union Pacific shares fell 6 percent after the railroad said its second-quarter earnings slumped 7 percent as coal volumes plummeted. While the price of crude is holding $50, investors fear that the recent decline will lead to further weakness in Canadian data. The Australian dollar also ended the day lower after some initial post CPI volatility.

The consumers’ price index (CPI) measures the rate of price change of household goods and services. AUD rallied initially but weakened just as quickly.

BNZ was the most recent major bank to cut its floating mortgage rate after the announcement. There are reports that the European Central Bank extended another lifeline to Greece today by raising its ceiling for emergency funds by 900 million euros. Kiwi tumbled more than 14% against the dollar in the last three months through Wednesday.

BONDS: U.S. government bond prices rose.

The heavily farming-dependent economy has been hit by a sharp drop in dairy prices over the past year. The decision signals towards the direction of further easing due to the low inflation and the weaker economic prospects. Wheeler said global growth remains moderate and there is “particular uncertainty” around the impact of an expected tightening in U.S. monetary policy. Between Thursday’s jobless claim and leading index and Friday’s new home sales report, we could see a further pullback in USD/JPY especially since 124.50 is proving to be an important resistance level.

“This Statement was not as dovish as markets were prepared for, particularly concerning the exchange rate”, Dominick Stephens and Michael Gordon, economists at Westpac Banking Corp.in Auckland, wrote in a note to clients. It will be interesting to see if the RBNZ continues to encourage the NZ Dollar lower in its OCR review or takes a step back, implying the exchange rate is no longer obviously over-valued. This indicates that at the next monetary policy meeting more than 1 member of the central bank could vote in favor of a rate rise.

“We should back ourselves to meet these latest challenges”.