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NZ dollar gains as Brexit-induced volatility eases

Wednesday 29th June 2016

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The New Zealand dollar gained as the extreme level of volatility in financial markets since last week's British vote to quit the European Union eased a little, though the prospect of another rate cut could ensure any rally is short-lived. 

The kiwi increased to 70.75 US cents at 5pm in Wellington from 70.39 cents at 8am, and 70.44 cents yesterday. The trade-weighted index rose to 75.90 from 75.70 yesterday.

Stocks across Asia gained as investors recover from last week's shock 'Brexit' vote and nervousness about what that might mean for financial markets eases, boosting demand for risk-sensitive assets such as the kiwi. The Chicago Board Options Exchange's Volatility Index, known as Wall Street's 'fear gauge', dropped 21 percent to 18.75 yesterday, indicating volatility in markets has eased. Demand for New Zealand's currency probably won't last long with an interest rate cut next month likely to follow the turmoil stoked by the British referendum. 

"The extreme volatility and shock of exiting has run its course, but's we're still going to see heightened levels of volatility," said Michael Johnston, senior deal at HiFX in Wellington. "That's going to limit how far the kiwi can rally in the near term." 

The kiwi rose to a new three-year high against the British pound, trading at 53.09 pence from 52.98 pence yesterday. 

In its statement of intent for 2016-2019, the Reserve Bank today reiterated that more cuts to the 2.25 percent official cash rate may be needed and that it's investigating new macroprudential tools to deal with the housing market. Separately, Finance Minister Bill English told Bloomberg the central bank has room to cut rates in response to the UK vote. 

HiFX's Johnston said if the RBNZ is confident it can implement new tools to take the steam out of the housing market and if July data shows inflation is still benign, governor Graeme Wheeler will cut rates at the Aug. 11 meeting. 

New Zealand's two-year swap rate increased three basis points to 2.21 percent, and 10-year swaps gained three basis points to 2.64 percent. 

The local currency rose to 95.53 Australian cents from 95.34 cents yesterday and climbed to 4.7081 Chinese yuan from 4.6824 yuan. It increased to 63.96 euro cents from 63.67 cents yesterday and gained to 72.45 yen from 71.83 yen.

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