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NZ dollar falls as greenback holds near 11-month high, quake costs assessed

Wednesday 16th November 2016

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The New Zealand dollar fell as the greenback held near its highest levels in 11 months on speculation a Republican Party in control of government will cut taxes and spend more on infrastructure, stoking US growth, inflation and interest rates.

The local currency fell to 70.92 US cents as at 5pm in Wellington from 71.11 cents late yesterday. The trade-weighted index fell to 77.36 from 77.47.

US president-elect Donald Trump has proposed spending US$550 billion on infrastructure and had talked of US$1 trillion of funding with private sector financing. From the executive wing, Trump will face Republican majorities in both chambers of the US Congress. The US dollar index, which measures the greenback against a basket of major currencies, has risen above 100 for the first time since December 2015 amid expectations the Federal Reserve will raise interest rates next month.

"All major currencies are re-aligning around the US dollar," said Derek Rankin, director of Rankin Treasury Advisory. "Ultimately the market's taking the view that tax cuts and increased spending; it's not just talk. Republicans have the three parts of government. They can actually do it."

In contrast to the Fed, the New Zealand central bank is probably done with cutting interest rates in an economy that's benefitting from a recovery in dairy prices, booming tourism and population growth.

Rankin said both the kiwi and the Australian dollar are "naturally buoyant" given the recovery in commodity prices including iron ore "so there's a bit of tension between the natural buoyancy of those two currencies and the strong US dollar."

He expects the "election euphoria will run out of steam at some point and the US dollar will correct back a little and when that happens the Aussie and the kiwi will bounce back". There may have been some tentative selling of the kiwi in the wake of the Kaikoura earthquake but the market had determined the economic impact wouldn't be of the scale of the devastating Christchurch quakes that prompted the Reserve Bank to make an emergency rate cut.

The kiwi didn't react much after the GDT price index increased 4.5 percent to US$3,519 at the GlobalDairyTrade auction overnight, while whole milk powder rose 3.2 percent to US$3,423 a tonne. The gain in whole milk powder "was a little disappointing but let's not forget it jumped 20 percent last time," said OMF's Nigel Brunel.

The kiwi dollar fell to 93.80 Australian cents from 94.05 cents late yesterday and rose to 77.36 yen from 76.88 yen. It fell to 4.8711 yuan from 4.8769 yuan, declined to 56.85 British pence from 56.91 pence and traded at 66 euro cents from 66.12 euro cents.

New Zealand's two-year swaps fell 4 basis points to 2.22 percent while the 10-year swap rate fell 2 points to 3.22 percent.

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