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NZ dollar slips as markets await Yellen, although doubts remain for any major surprises

Friday 26th August 2016

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The New Zealand dollar fell as financial markets await a speech from Federal Reserve chair Janet Yellen tonight that may give a clearer view of US monetary policy and therefore the direction of the US dollar.

The kiwi fell to 72.97 US cents as at 8am in Wellington, from 73.16 cents late yesterday. The trade-weighted index slipped to 77.35 from 77.50.

The market is pricing in just 16 basis points of hikes this year by the Fed, with December seen as the most likely meeting if it does move, and any stronger hint of a hike by Yellen would force traders to reprice that risk. A Fed rate hike would amplify the effects of the Reserve Bank in cutting interest rates, driving the kiwi lower, after governor Graeme Wheeler signalled he expects at least one further cut to the official cash rate.

"Most currencies continue to trade tight ranges ahead of Fed Chair, Yellen’s scheduled speech tonight at the Jackson Hole symposium," said Kymberly Martin, senior market strategist at Bank of New Zealand. "Across risk assets, currencies bonds and commodities, ranges were fairly contained overnight. This reflects that a common factor in the performance of each is the outlook for US monetary policy. Markets are unwilling to express strong views on this ahead of tonight’s appearance by Yellen."

Martin noted that the recent high for 10-year US Treasuries was 1.63 percent and  said: "We would be stunned if the inherently cautious Yellen proved the catalyst for US 10-year yields to break above recent range highs. But we stand ready to be surprised."

The kiwi gave up its gains of yesterday that had been driven by Fonterra Cooperative Group's announcement that it had raised its forecast payout 50 cents to $4.75 per kilogram of milk solids, citing the recent price gains on the GlobalDairyTrade auction as global production is scaled back, bringing the supply back into balance.

The kiwi fell to 95.79 Australian cents from 95.92 cents and fell to 4.8569 yuan from 4.8665 yuan. It declined to 64.69 euro cents from 64.91 cents and was little changed at 55.36 British pence from 55.29 pence. The kiwi slipped to 73.41 yen from 73.50 yen.

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