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NZ dollar TWI climbs to new 13-month high as high yields attract investors

Tuesday 5th July 2016

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The New Zealand dollar rose to a new 13-month high on a trade-weighted basis as the relatively high yield on offer continues to attract investors wary of low interest rates persisting for longer than expected. 

The trade-weighted index climbed as high as 77.15, and was at 77.10 at 8am in Wellington from 76.65 yesterday. The kiwi gained to 72.30 US cents from 71.77 cents yesterday, with US markets closed for the Independence Day holiday. 

The Reserve Bank's 2.25 percent official cash rate stands out in a world where many central banks are still running near-zero policies and may inject more stimulus to counter the added volatility stoked by the UK's vote to leave the European Union last month. The yield on New Zealand's 10-year government bond is near a record low at 2.33 percent, though still higher than the 1.46 percent yield on US 10-year Treasuries and negative yields on European and Japanese 10-year government bonds. 

"The forthcoming Brexit negotiations with the EU and the wave of elections in Europe next year (The Netherlands, France, Germany) have raised political risk in Europe. We expect continued portfolio flows out of the region, intensifying the hunt for yield and safety/remoteness," ANZ Bank New Zealand senior rates strategist David Croy said in a note. "The mantra seems to be, 'if in doubt buy kiwi' again. The market’s love affair with yield and all-things-not-Europe remains supportive."

The New Zealand Institute of Economic Research's quarterly survey of business opinion comes out at 10am and is expected to show confidence improving, while Quotable Value figures at midday will likely report accelerating national house price growth. After that, dairy prices are expected to rise by between 3 percent and 5 percent at the GlobalDairyTrade auction overnight. 

The kiwi was little changed at 95.91 Australian cents from 95.83 cents yesterday ahead of the Reserve Bank of Australia's policy review. The board is expected to keep the target cash rate at 1.75 percent, while the uncertain outcome of the weekend's federal election keeps investors nervous about the fortunes of the so-called 'lucky country'. 

The local currency climbed to an 18-month high against the Chinese yuan, trading at 4.8183 yuan at 8am from 4.7799 yuan yesterday. The People's Bank of China yesterday said it would use various tools to maintain liquidity and reasonable credit growth. 

The kiwi rose to 74.15 yen from 73.70 yen yesterday and gained to 54.39 British pence from 54.02 pence. It advanced to 64.83 euro cents from 64.44 cents yesterday.

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