NZ dollar sinks to 69 US cents in face of 'perfect storm' of Fed about to hike, weaker NZ outlook

Thursday 9th March 2017

The New Zealand dollar traded at about 69 US cents, having dropped more than 6 percent in the past four weeks on expectations the Federal Reserve will start hiking interest rates next week while the Reserve Bank will keep its official cash rate at a record low for the foreseeable future.

The kiwi fell to 69 US cents as at 5pm in Wellington from 69.63 cents late yesterday and down from as high as 73.74 cents on Feb. 7. The trade-weighted index declined to 75.90 from 76.18 yesterday.

Market bets on a Fed rate hike at its policy meeting next week have been above 90 percent and those views were underlined overnight with the release of ADP private sector employment data for February, which showed 298,000 jobs created, compared with expectations for 187,000. That boosts the prospects for a strong non-farm payrolls number from the Labor Department on Friday and has stoked speculation the Fed will have to tighten monetary policy more than the market currently expects. By contrast, New Zealand economic indicators have come off the boil, including a 1.8 percent drop in manufacturing sales in the fourth quarter, while dairy prices extended their slide at this week's GlobalDairyTrade auction.

"It's a perfect storm against the kiwi. A new cyclical direction for the kiwi is underway," said Graham Parlane, private client manager at OMF. "The interest rate yield advantage is currently only 1 percent on the cash rate and that's clearly going to narrow as the Fed hikes more."

Bank of New Zealand this week forecast New Zealand fourth-quarter gross domestic product only grew by 0.4 percent, less than half the 1 percent pace the Reserve Bank forecast in its February monetary policy statement. The figures are due for release on March 16.

Parlane said the kiwi dollar may find support at about 68.70 US cents overnight and resistance at 69.40 cents, although the European central bank's policy announcement tonight is a wild card. Longer term, the New Zealand dollar would struggle to break above 71 US cents, he said.

The local currency rose to 91.86 Australian cents from 91.59 cents yesterday and fell to 4.7758 Chinese yuan from 4.8041 yuan. It declined to 56.75 British pence from 57.02 pence yesterday and fell to 65.52 euro cents from 65.89 cents. The kiwi traded at 79.02 yen from 79.15 yen yesterday.

The two-year swap rate rose 3 basis points to 2.31 percent and 10-year swaps rose 5 basis points to 3.56 percent.

BusinessDesk.co.nz

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