NZ dollar up on risk appetite after hawkish central banks and US bank stress tests

Thursday 29th June 2017

The New Zealand dollar rose on improving global risk appetite after hawkish comments from a raft of central banks and after all major U.S. financial institutions received approval from the Federal Reserve to ramp up dividend payouts and share buybacks.

The kiwi traded at 73.18 US cents as at 5pm from 73.09 US cents as at 8am and from 72.76 cents yesterday. The trade-weighed index was at 78.37 from 78.21.

"Banking stocks are on a tear today after the US banks passed their stress tests and after the bell today they all announced buybacks and special dividends. The world is a happy place and there's been some good risk appetite across the board," said Tim Kelleher, head of institutional foreign exchange sales at ASB Bank.

Reuters reported that the Federal Reserve approved plans from the 34 largest U.S. banks to use extra capital for stock buybacks, dividends and other purposes beyond being a cushion against catastrophe. On Wednesday, the Fed said those lenders, including household names like JPMorgan Chase & Co and Bank of America Corp, had passed the second, tougher part of its annual stress test, Reuters said. The results showed that many have not only built up adequate capital buffers but improved risk management procedures as well.

Kelleher said he wasn't surprised to see both the New Zealand dollar and the Australian dollar rise after Bank of England governor Mark Carney signalled it may be necessary to remove some of the bank's monetary stimulus, suggesting interest rates could be raised as British economic growth picks up, while policymakers at the Bank of Canada suggested they might move to tighten rates as early as July.

"The market is now questioning whether the RBA and the RBNZ might have to go as well," despite efforts by both central banks to signal rates would be on hold for quite some time, he said.

The kiwi fell against the British pound overnight after Carney's comments but was little changed in Asia and was trading at 56.46 British pence from 56.50 British pence as at 8am in Wellington and from 56.77 pence late yesterday.

It was also largely unchanged against the euro after the market shrugged off attempts by European Central Bank president Mario Draghi to tone down his prior statement when he hinted the ECB might start winding down its stimulus. "The market is largely ignoring Draghi, in particular after Carney and the Bank of Canada," said Kelleher. "They don't believe him in the slightest."

The kiwi was trading at 64.15 euro cents from 64.11 cents late yesterday.

Looking ahead, Kelleher said markets will be watching for US core personal consumption expenditures (PCE) index data, Federal Reserve Chair Janet Yellen's preferred measure of inflation.

The local currency slipped to 95.52 Australian cents from 95.72 cents late yesterday and rose to 82.10 yen from 81.59 yen. The kiwi gained to 4.9588 yuan from 4.9487 yuan.

New Zealand's two-year swap rate rose 2 basis points to 2.26 percent while the 10-year swap rate rose 4 basis points to 3.24 percent.

(BusinessDesk)

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