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NZ dollar drops to 2-year low on trade tensions, Germany coalition concerns as QSBO looms

Tuesday 3rd July 2018

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The New Zealand dollar fell to a two-year low on escalating global trade tensions and signs of instability in Germany's coalition government that sapped risk sentiment and boosted demand for safe-haven currencies such as the yen.

The kiwi dollar declined to 67.05 US cents as at 8:30am in Wellington, having dropped to 66.77 cents overnight, from 67.70 cents late yesterday. The kiwi dropped to 74.32 yen from 74.96 yen and the trade-weighted index fell to 71.96 from 72.41.

The local dollar and swap rates have fallen since last week's Reserve Bank interest rate review, which opened the possibility of a cut to rates as much as a hike. Meanwhile, US President Donald Trump is expected to impose additional tariffs on Chinese imports this week while Germany's Interior Minister Horst Seehofer has threatened to resign, raising concerns about the stability of Chancellor Angela Merkel's coalition government. In New Zealand today, the NZIER's quarterly survey of business opinion will show whether corporate gloom is persisting.

"The beginning of the third quarter has got off to a rough start, with falling risk appetite seeing weaker equity markets and the NZD and AUD diving to fresh lows," said Jason Wong, senior markets strategist at Bank of New Zealand, in a note. This morning's second-quarter QSBO "will provide more information on the state of the economy, likely to show further slippage in activity indicators and rising inflationary pressure, an awkward mix as the RBNZ decides the appropriate course of monetary policy."

The QSBO follows the monthly ANZ Business Outlook, which has shown weaker sentiment and own-activity measures and has been criticised by the government because of the implication the Labour-led coalition has contributed to the drop in confidence.

Tonight, the latest Global Dairy Trade auction is expected to show a continuation of tepid prices and across the Tasman today, building approvals for May and the Reserve Bank of Australia's latest interest rates review (with no change expected) are scheduled.

The kiwi fell to 57.70 euro cents, having touched a six-month low of 57.59 cents overnight, from 58.11 cents yesterday.

New Zealand’s two-year swap rate fell 5 basis points to 2.09 percent while 10-year swaps fell 3 basis point to 2.96 percent, having fallen below 3 percent for the first time in more than 18 months as markets push back their rate hike expectations and even move to factor in the possibility of a rate cut. 

The local currency fell to 91.42 Australian cents from 91.73 cents yesterday. It fell to 4.4677 yuan from 4.4932 yuan and dropped to 51.05 British pence from 51.39 pence.


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