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NZ dollar under pressure as greenback pushes higher after Yellen

Wednesday 27th September 2017

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The New Zealand dollar remained under pressure as investors lifted the probability of a US rate hike in December after what were viewed as hawkish comments by the US Federal Reserve chair Janet Yellen, boosting demand for the greenback.

Geopolitical tensions on the Korean peninsula and domestic political uncertainty also continued to weigh on the kiwi. 

The local currency traded at 72.09 US cents as at 5pm versus 72.04 cents as at 8am in Wellington, down from 72.45 cents late yesterday. The trade-weighted index fell to 75.85 from 75.91.

The US dollar got a solid lift after Yellen said "persistently easy monetary policy" could lead to developments that could have "adverse implications for financial stability," in a speech to the US National Association of Business Economics. According to Reuters, markets are now pricing in a 78 percent of a rate increase in December, up from 72 percent late last week. The greenback is also benefiting from talk that US tax reform announcements are imminent. 

Sheldon Slabbert, a trader at CMC Markets, said the content of any tax reform will be key. "If we can add a bit of clarity and a bit more detail, not just a wish list ... I think the markets will take that positively. But if he (US President Donald Trump)  just waffles without any substance, the market is looking for any reason right now to take risk off the table."

Among other things, ongoing tensions between the US and North Korea are not "filling people with confidence," he said. 

On the domestic front uncertainty around who will form the next government after no party won a clear majority in Saturday's election is weighing on sentiment but Slabbert said the overall US dollar resurgence and risk appetite are really what's driving the market and will likely outweigh any election outcome. 

Looking ahead, investors will be watching for the Reserve Bank's monetary policy decision tomorrow. However, with the RBNZ tipped to keep rates on hold at a record low 1.75 percent and to issue a very similar message to August when it said "numerous uncertainties remain and policy may need to adjust accordingly," there may be little reaction in the dollar. 

The kiwi traded at 61.14  euro cents from 61.08 cents late yesterday. It rose to 80.99 yen from 80.78 yen and traded at 53.63 British pence from 53.73 pence. It rose to 91.52 Australian cents from 91.17 cents. It slipped to 4.7814 yuan from 4.7926 yuan.

The two-year swap rate rose 2 basis points to 2.19 percent and 10-year swaps gained 4 basis points to 3.20 percent.


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