NZ dollar, attractive on yield basis, gains before Fed, Bank of Japan statements

Tuesday 26th July 2016

The New Zealand dollar gained late in the day, although there were no obvious drivers other than demand for yield as traders await the outcome of policy reviews by the Federal Reserve and the Bank of Japan.

The kiwi jumped to 70.49 US cents as at 5pm in Wellington, from 69.89 US cents at the start of the day and from 69.79 cents yesterday. The trade-weighted index gained to 75.51 from 74.98 yesterday.

With little local news, deliberations by Fed policymakers are the next big hurdle for markets, with their decision to be known on Wednesday in Washington. Economists expect the Fed to keep its rate target at 0.25 percent to 0.5 percent and the market will be looking for clues to the timing of any hikes this year. The Bank of Japan is expected to announce further stimulus measures on Friday.

"We're expecting Japan to stimulate a lot and for the Fed, no action but sounding a bit more upbeat and maybe a comment that September is live" for an interest rate hike, said Imre Speizer, senior market strategist at Westpac Banking Corp. The market is giving 60 percent odds of a Fed hike by December, while the Bank of Japan could add stimulus by increasing its asset purchase programme.

In the meantime, "there's a lot of capital flowing around the world looking for yield" and some of that is finding its way to the kiwi, he said.

Even if the Reserve Bank cuts the official cash rate a quarter point to 2 percent in August, as expected, it would still be at least 150 basis points higher than the fed funds rate and a quarter point above the Reserve Bank of Australia's cash rate.

The kiwi didn't move much after figures showed a $127 million trade surplus in June for an annual trade deficit of $3.31 billion, in line with a Reuters poll of economists and wider than the year-earlier deficit of $2.98 billion.

The local currency rose to 93.68 Australian cents from 93.35 cents ahead of inflation data across the Tasman tomorrow. The consumer price index will be watched to shore up bets the Reserve Bank of Australia will cut interest rates next week.

The kiwi decreased to 73.62 yen from 74.17 yen yesterday ahead of the Bank of Japan policy meeting later this week. Governor Haruhiko Kuroda is expected to boost the bank's asset purchase programme to try to stir moribund inflation in the world's third-biggest economy.

The local currency rose to 53.76 British pence from 53.14 pence yesterday and gained to 64.07 euro cents from 63.58 cents. It increased to 4.7083 Chinese yuan from 4.6598 yuan yesterday.

New Zealand's two-year swap rate fell 1 basis point to 2.03 percent and 10-year swaps were up one basis point to 2.45 percent.

BusinessDesk.co.nz

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