NZ dollar falls as traders ponder whether Yellen will dent kiwi-yield story

Wednesday 24th August 2016

The New Zealand dollar fell as traders speculated Federal Reserve chair Janet Yellen may echo recent hawkish statements by other Fed officials, giving impetus to the greenback.

The kiwi traded at 72.79 US cents as at 5pm in Wellington, from 73.16 cents late yesterday. The trade-weighted index fell to 77.16 from 77.38, still above the RBNZ's projection for the TWI to average 76 this quarter.

Yellen's speech at the Jackson Hole retreat for central bankers on Friday has come into sharper focus after Fed vice chair Stanley Fischer signaled in a speech last weekend that a 2016 rate hike was still under consideration and that measures of employment and productivity in the US economy, were close to meeting the central bank’s goals. A hawkish Yellen could undermine a kiwi dollar that has been a standout because of the high yields available and relatively robust New Zealand growth.

"The kiwi dollar looks very compelling for overseas investors with high yields and it looks like some commodities are recovering in the second half of this year," said Angus Nicholson, market analyst at IG Markets. "If Yellen fails to set a hawkish tone, the kiwi could maybe get up to 73.50" US cents.

The market is pricing just a 50:50 chance that the Fed will hike interest rates in December. "It will only take one or two major US data misses to see that likelihood disappear and the market start looking ahead to 2017," Nicholson said.

The kiwi didn't move much after figures showed New Zealand’s merchandise trade deficit narrowed to $433 million in July from the same month last year as imports such as crude oil fell faster than exports such as milk powder and meat.

The local currency rose as high as 73.44 US cents after the Reserve Bank yesterday reiterated expectations for 35 basis points of further cuts to the official cash rate, but pushed back against critics calling for either a pause or more aggressive action. The speech, written by governor Graeme Wheeler and delivered by assistant governor John McDermott, said a lower rate was needed to prevent weak low inflation expectations from bedding in, but to go faster would risk promoting instability in the financial system.

The kiwi was little changed at 95.69 Australian cents from 95.71 cents yesterday and fell to 4.8458 Chinese yuan from 4.8668 yuan. It traded at 64.45 euro cents from 64.57 cents and declined to 55.24 British pence from 55.64 pence. The kiwi decreased to 73.13 yen from 73.29 yen yesterday.

New Zealand's two-year swap was unchanged at 1.97 percent and 10-year swaps fell 1 basis point to 2.41 percent.

BusinessDesk.co.nz

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