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NZ dollar firms despite US-China trade jitters

Friday 1st November 2019

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The New Zealand dollar rose despite the re-emergence of jitters over a potential US-China trade deal. It was helped by the People's Bank of China gently lifting the yuan all week and by decreasing expectations of a local interest rate cut next week.

The kiwi was trading at 64.35 US cents at 5:05pm in Wellington from 64.10 at 8am while it rose to 4.5304 yuan from 4.5113. The currency has gained the best part of a US cent this week after closing in New York last Friday at 63.49 cents.

"Part of the reason for the New Zealand dollar being stronger is that the Chinese have set the yuan stronger all week," says Peter Cavanaugh, the senior client advisor at Bancorp Treasury Services.

The PBOC fixed the yuan at 7.0437 to the US dollar today compared with 7.0749 last Friday – the central bank allows the currency to fluctuate by 2 percent around the mid-point that it sets daily.

"It's an attempt to curb the market's enthusiasm for a weaker yuan,"  Cavanaugh says. The market had been front-running the currency's depreciation and the PBOC won't want to give the Americans an excuse to accuse it of currency manipulation, he says.

Yesterday, Westpac said it no longer expects the Reserve Bank to cut its official cash rate on Nov. 13, although it still expects a cut in February.

Cavanaugh says market pricing now rates the chances of a rate cut at 50:50.

"You would have to think that, given what happened today, there's going to be more doubt than certainty," particularly when it comes to global trade.

US President Donald Trump said he still expects to sign a preliminary trade deal with China, despite Chile cancelling the APEC meeting, and that both countries are working to secure a new site for the signing ceremony.

However, the market expects any such preliminary deal will sidestep the difficult issues. Bloomberg has reported that China doubts a long-term deal is possible because of Trump's impulsive and unpredictable behaviour.

Eswar Prasad, who once led the International Monetary Fund's China team and is now at Cornell University told Bloomberg that the Chinese "are quite pessimistic. They fear that any deal that they negotiate with Trump could blow up in their face."

The New Zealand dollar was at 93.12 Australian cents from 93.02, at 49.63 British pence from 49.55, at 57.62 euro cents from 57.49, at 69.50 yen from 69.21 and the trade-weighted index was at 70.84 points from 70.63.

The two-year swap rate eased to a bid price of 1.0095 percent from 1.0225 percent late yesterday. The 10-year swaps fell to 1.3800 percent from 1.4125 percent.


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