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NZ dollar hits fresh 3-month high amid reports China may scale back US govt bond buying

Thursday 11th January 2018

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The New Zealand dollar rose to a new three-month high as reports China may cut its purchases of new US government bonds weighed on Wall Street and the greenback. 

The kiwi rose as high as 72.28 US cents and traded at 71.90 cents as at 8am in Wellington from 71.64 cents yesterday. The trade-weighted index advanced to 74.82 from 74.66 yesterday. 

Stocks on Wall Street and the greenback fell while US Treasuries were also sold off, pushing yields higher, on media reports citing unnamed sources that Chinese officials reviewing the Asian nation's foreign-exchange holdings recommended slowing or completely halting purchases of US Treasuries. China is the biggest foreign holder of US government debt with US$1.19 trillion of Treasuries as of October last year, and has been placed under increased pressure from US President Donald Trump over the nations' trading relationship. 

"With trade tensions suggested as one of the reasons for China to hold less US debt overnight, currency moves in 2018 won’t solely be about where the best returns are on offer," ANZ Bank New Zealand rural economist Con Williams said in a note. The kiwi dollar "tested topside resistance overnight, but has the feeling that a better run of domestic data over the next week could see this broken." 

The kiwi rose to 4.6775 Chinese yuan from 4.6713 yuan yesterday after the report. However, Bank of New Zealand interest rate strategist Nick Smyth warned against reading too much into the reports, given the size of the US bond market meant it was hard for a buyer of China's size to ignore and that until the yuan is freely floated, intervention to limit the Chinese currency's appreciation would stoke demand for the greenback. 

"The market reaction does highlight the negative sentiment towards bonds at present," he said in a note. 

New Zealand rates opened higher, with the two-year swap rate up 1 basis point to 2.2 percent and the 10-year swap rising 2 basis points to 3.2 percent. 

Japan's yen was the strongest currency overnight in the wake of the Chinese reports, continuing a run since the Bank of Japan trimmed its purchases of Japanese government bonds, which some traders took to indicate a slight policy tightening by the central bank. The kiwi fell to 80.15 yen from 80.43 yen yesterday. 

The local currency gained to 91.64 Australian cents from 91.49 cents yesterday and edged up to 60.12 euro cents form 59.97 cents. It increased to 53.20 British pence from 52.92 pence yesterday. 


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