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NZ dollar plunges on report of low inflation

NZ dollar plunges on report of low inflation

Jan 18 (BusinessDesk) - The New Zealand dollar shed more than half a US cent on weaker than expected consumer price index (CPI) data on Friday.

The kiwi fell about 60 basis points to 83.46 US cents but recovered to be 83.54 cents at 5pm. That compared to 84.10 cents at 8am and 83.93 US cents at 5pm on Thursday.

The trigger was news that the CPI fell 0.2 percent in the December quarter when the market consensus was for a 0.1 percent rise.

"Financial markets seemed to react to the fact that annual inflation was outside the Reserve Bank of New Zealand's (RBNZ's) 1 to 3 percent target range for a second quarter," Westpac economists said.

The two-year swap rate fell three basis points to 2.79 percent.

The data confused the outlook for interest rates because the RBNZ had been expected to hold the official cash rate at 2.5 percent for most of this year before raising it. Weak inflation data raised the prospect of a rate cut.

"We view an official cash rate reduction as a risk scenario rather than a likelihood. The RBNZ's target is framed in terms of its inflation forecast, which will still be lingering close to 2 percent on average after today's CPI data," Westpac said.

Interest turned to offshore influences in the afternoon with the release of a slew of Chinese economic data.

The kiwi firmed on news that China's Gross domestic product increased by 7.8 percent in 2012, down from 9.3 percent in 2011 as the data also showed that the economy picked up pace in the last three months of the year.

The kiwi was at 79.42 Australian cents at 5pm, slightly down from the 79.86 cents at 5pm on Thursday.

It was at 75.18 yen from 74.11 yen at 5pm on Thursday, and was 62.41 euro from 63.19 euro and 52.27 British pence from 52.48 pence.

The trade-weighted index was at 75.25 from 75.40.

(BusinessDesk)

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