NZ dollar hits new record against euro, may extend gains on ECB bond buying

Monday 16th March 2015

The New Zealand dollar reached its highest level ever against the euro in what may be the first of more peaks as the euro falls foul of the European Central Bank's bond-buying programme.

The kiwi hit a record 70 euro cents on Monday morning, and was trading at 69.96 cents at 5pm in Wellington from 69.47 cents at 5pm on Friday. The local currency rose to 73.64 US cents from 73.39 cents at the New York close on Friday.

The kiwi may trade between 71.30 US cents and 75.20 cents this week, according to a BusinessDesk survey of 11 currency traders and strategists. Six expect the currency to decline, while two say it may rise and three bet it will remain broadly unchanged.

Sam Tuck, senior FX strategist at ANZ New Zealand, said the kiwi may dip on this week's GlobalDairyTrade dairy auction as he's picking prices will be weak but there will be a reminder of the strength of the New Zealand economy when fourth quarter gross domestic product figures are released on Thursday.

The report is expected to show the New Zealand’s economy expanded at a 0.7 percent pace in the fourth quarter, for an annual average growth rate of 3.2 percent, according to a Reuters poll.

The US dollar is at its highest level in 12 years amid speculation the Federal Reserve Open Market Committee will drop the word “patient” from its policy statement at 7am Thursday New Zealand time, suggesting the Fed is getting close to lifting its benchmark interest rate which has been near zero since 2008.

That leaves the euro out of favour for as the European Central Bank buys 60 billion euros worth of bonds per month it pushes bond yields lower and investors look offshore for returns, weakening the euro.

"This morning we got above 70.00 euro cents and our expectation is the euro will continue to decline over 2015. Our forecasts expect kiwi-euro to get to 73 to 74 by the end of the year," Tuck said. "It's a euro-US story or more specifically a euro versus everything else story," he said.

German 10-year bond yields have been as low as 0.25 percent and the spread between Bunds and Treasuries is the widest in 25 years. With the ECB prepared to buy bonds with yields below zero, we may well see yields on European bonds may fall further this week.

The BNZ-BusinessNZ performance of services index released today showed continuing growth in February. The index fell 2.2 points to 55.6 last month, with all five sub-indexes above the 50 level that separates contraction from expansion.

The New Zealand dollar gained to 96.23 Australian cents from 95.99 cents on Friday. The local currency was at 49.86 British pence from 49.58 pence on Friday and 89.29 yen from 89.58 yen. The trade-weighted index rose to 77.95 from 77.87 on Friday.

BusinessDesk.co.nz

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