NZ dollar extends decline as PBOC devalues yuan, spooking investors

Wednesday 6th January 2016

The New Zealand dollar extended its decline after the People's Bank of China unexpectedly devalued the yuan, stoking fears the strength of the world's second-biggest economy may be wavering.

The local currency fell to 66.53 US cents at 5pm in Wellington from 66.93 cents at 8am, and 67.39 cents at 5pm. The kiwi declined to 4.3545 Chinese yuan from 4.3926 yuan yesterday.

China's central bank lowered its reference rate for a seventh day, devaluing the yuan against the greenback by about 0.3 percent. That surprised investors and further encouraged them to seek out safe-haven assets, such as Japan's yen, and eschew risk-sensitive currencies such as the kiwi and Australian dollars. The Aussie and kiwi were also dragged lower by falling commodity prices, with tensions in the Middle East weighing on oil prices, and the latest GlobalDairyTrade auction showing a fall in whole milk powder prices.

The devaluation of the yuan "wasn't earth-shattering, but it surprised the market once again," said John Rea, senior corporate dealer at HiFX in Auckland. "That saw the kiwi and Aussie lower - overall there's a flight from risk to safe-haven currencies like the US dollar and Japanese yen."

The kiwi dropped to 78.93 yen from 80.53 yen yesterday, and declined to 93.32 Australian cents from 93.58 cents.

New Zealand's two-year swap rate dropped four basis points to 2.78 percent at 5pm in Wellington, and 10-year swaps fell six basis points to 3.63 percent.

Figures from Auckland realtor Barfoot and Thompson showed house sales fell in December while prices were stable. Auckland's bubbling property market prompted the Reserve Bank to impose lending curbs last year as a means to try and control house prices while at the same time cutting interest rates.

The kiwi fell to 61.91 euro cents from 62.28 cents yesterday, and dropped to 45.37 British pence from 45.78 pence.

BusinessDesk.co.nz

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