NZ dollar falls as Fed minutes point to June rate hike, driving up greenback

Thursday 19th May 2016

The New Zealand dollar fell as the US dollar surged in response to the publication of minutes of the last Federal Open Market Committee which hinted at an interest rate increase as soon as next month, driving up demand for the greenback.

The kiwi fell to 67.30 US cents at 5pm in Wellington from 67.90 cents late yesterday. The trade-weighted index fell to 72.55 from 72.79.

The Fed minutes explicitly mention the chance of a rate hike in June, although with the usual proviso that it would depend on the flow of economic data. While there was some dissent among policymakers, most participants concurred with the view that rates could rise. Bets on a June rate cut immediately climbed, with the chances seen as 32 percent, up from 12 percent before the minutes were released, based on the overnight interest swap market.

"They seem to want to pull the trigger and hike," said Nick Tvedt, a senior corporate dealer at NZ Forex."We would expect the US dollar to have a bit more steam in it yet."

The US dollar index, which measures the greenback against a basket of currencies, rose to its highest level in about five weeks after the minutes were released saying a June hike was "likely" if second-quarter growth, inflation and labour data improved. Tvedt said some US inflation indicators "have been trending back towards the Fed's 2 percent target."

The kiwi didn't move much after figures showed the Australian economy added 11,000 jobs last month, while the unemployment rate held at 5.7 percent, less than the 5.8 percent rate expected by economists in a Reuters survey.

The New Zealand dollar dropped to 46.16 British pence from 47.02 pence and the pound was among the few currencies not to tumble against the greenback overnight.

Tvedt said sterling's strength probably reflected a poll that showed growing support for Britain to remain in the European Union. A poll in the Evening Standard newspaper indicated sentiment in the upcoming referendum on EU membership had tipped in favour of the ‘remain’ camp, where support grew to 55 percent from 49 percent. Those favouring leaving the EU slipped to 37 percent from 39 percent.

The kiwi rose to 74.17 yen from 74.02 yen and fell to 4.4052 yuan from 4.4352 yuan. It dropped to 60.02 euro cents from 60.16 cents and gained to 93.44 Australian cents from 93.17 cents.

The two-year swap rate rose 7 basis points to 2.27 percent and the 10-year swaps rose 9 basis points to 2.93 percent.

BusinessDesk.co.nz

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