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NZ dollar falls as speculation over Bank of Japan stimulus drives up bond yields

Tuesday 24th July 2018

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The New Zealand dollar fell as mounting speculation the Bank of Japan will adjust its extraordinary stimulus programme drove up US government bond yields and as Chinese authorities added more support to lenders. 

The kiwi declined to 67.82 US cents as at 8am in Wellington from 68.14 cents yesterday. The trade-weighted index was at 73.01 from 73.10 yesterday. 

The yield on US 10-year Treasuries rose 7 basis points to a month-high 2.96 percent as investors weighed up the impact of a new policy framework for the Bank of Japan, which has been buying government bonds as a means to stir inflation in the world's third-biggest economy. Japan's central bank may review the framework controlling its yield curve to make it more sustainable, according to media reports. The kiwi traded at 75.57 yen from 75.60 yen yesterday. 

"Japanese institutions are major investors in global fixed income markets (searching out higher returns than those available in Japan), and so the market is very sensitive to any potential changes that might incentivise them to switch back to JGBs (Japanese government bonds)," Bank of New Zealand interest rate strategist Nick Smyth said in a note. 

Meanwhile, the People's Bank of China injected 502 billion yuan into its market through a medium-term lending facility, giving Chinese lenders greater liquidity by letting them borrow from the central bank. The PBoC has been setting the yuan's reference rate lower and providing greater support to lenders as the world's second-biggest economy slows, which have also been seen a means to limit the fall-out from a trade war with the US. The yuan has fallen 6 percent against the greenback over the past month. The kiwi traded at 4.6068 Chinese yuan from 4.6053 yuan yesterday. 

"The weakness in the CNY added some downward pressure to the AUD and the NZD, with both currencies falling around 0.5 percent overnight (the weakest performing currencies on the day)," Smyth said. 

No local data is scheduled for today. Across the Tasman, investors will be watching Australian consumer confidence. The kiwi traded at 91.83 Australian cents from 91.77 cents yesterday. 

The local currency traded at 58 euro cents from 58.08 cents yesterday and edged down to 51.75 British pence from 51.84 pence. 


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