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NZ dollar takes breather; investors eye US-China trade developments

Monday 12th August 2019

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The New Zealand dollar was little changed as the market absorbed the after-shocks from last week’s big rate cut from the Reserve Bank and as investors await further developments in the US-China trade war.

The kiwi was trading at 64.69 US cents at 5:05pm in Wellington from 64.65 at 7:50am. The trade-weighted index was at 71.88 points from 71.86.

The currency briefly spiked down as low as 64.37 US cents in the middle of the day after reports that Treasury had said it wasn’t keen on the Reserve Bank using unconventional monetary policy measures such as quantitative easing - effectively a form of printing money through buying securities from banks.

Treasury say the reports were based on an Official Information Act release and that it is “inaccurate to suggest that the Treasury see asset purchases as ‘less appealing’ than negative rates.” It was also inaccurate to say that Treasury views negative 35 basis points as the lower limit of the official cash rate, as had been reported.

“As stated clearly in the OIA release, the paper was not policy advice and included no conclusions on preferred policy options,” Treasury said in response to BusinessDesk’s query.

Last Wednesday, the Reserve Bank shocked the market by cutting the OCR by 50 basis points to 1 percent. In the past, the central bank has only ever cut rates by that much in the midst of some crisis such as the Christchurch earthquakes in 2011. It usually only moves the OCR by 25 basis points.

“The markets have taken the opportunity to take a breather after last week’s intense volatility,” says Peter Cavanaugh, the senior client advisor at Bancorp Treasury Services.

“There’s been no data here or in Asia” that has moved the market, he said. “The Asian markets appear to have opened up reasonably quiet,” Cavanaugh says.

Last week, the US government labelled China a currency manipulator after the exchange rate moved above 7 yuan to the greenback for the first time in 11 years. The People’s Bank of China has set its mid-point reference above 7 for each of the past three trading days, most recently today at 7.0211.

That’s still higher than the market which has the US dollar at almost 7.09 yuan.

Goldman Sachs’ economists are now saying they don’t expect a trade deal between the US and China before the 2020 US presidential election, which takes place in November that year, and that fears the trade war will lead to a global recession are increasing.

US President Donald Trump started the trade war last year and the US has slapped 25 percent tariffs on US$200 billion of Chinese imports and is threatening to target the remaining US$300 billion of Chinese imports with more tariffs starting at 10 percent from Sept. 1.

Goldman Sachs says it expects those tariffs will proceed.

The New Zealand dollar was trading at 95.27 Australian cents from 95.28, at 53.72 British pence from 53.56, at 57.69 euro cents from 57.74, at 68.17 yen from 68.29,  and at 4.5678 yuan from 4.5651.

The New Zealand two-year swap rate edged down to a bid price of 0.9647 percent from Friday’s close at 0.9733. The 10-year swap rate bounced off Friday’s record low to 1.2950 percent from 1.2725.


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