NZ dollar gains as new govt spending set to stimulate economy

Tuesday 15th December 2015

The New Zealand dollar gained as investors renewed their appetite for risk-sensitive assets ahead of the US Federal Reserve's policy review on Thursday and after Finance Minister Bill English said he'd give the local economy a bit of a jolt with extra spending next year.

The kiwi rose to 67.91 US cents at 5pm in Wellington from 67.76 cents at 8am and 67.07 cents yesterday. The trade-weighted index advanced to 73.81 from 73.08 yesterday.

New Zealand's Treasury today updated its economic and fiscal forecast, projecting a small operating deficit as a slowing economy and tepid inflation keep a lid on the government's tax-take. Despite this, Finance Minister English was relatively upbeat about the outlook, which is still showing an improvement on previous years, and announced plans to increase the Crown's capital spending by $1 billion in the 2016 budget, which will provide a boost to the economy. His move comes after Reserve Bank governor Graeme Wheeler said infrastructure investment by the government would be a welcome addition in helping stoke economic activity and reviving flagging inflation.

"The fact that the government is bringing forward additional spending in 2016 by $1 billion adds to the stimulatory effect by the government and combined with the low rates from the Reserve Bank at the moment - it's kind of a big tick," said Stuart Ive, senior dealer foreign exchange at OMF in Wellington. "The markets are extremely skittish at the moment, but the kiwi has been fairly rampant in the last few days and today's no different."

The upcoming GlobalDairyTrade auction is likely to be supportive for the kiwi dollar with futures pricing indicating another rise, while Thursday's third-quarter gross domestic product report may also surprise on the upside, providing more demand for the local currency, Ive said.

New Zealand's two-year swap rate advanced six basis points to 2.81 percent at 5pm in Wellington, and 10-year swaps gained seven basis points to 3.66 percent.

The Federal Open Market Committee's policy review on Wednesday in Washington is still hanging over the market, with uncertainty over how fast the world's central bank plans to raise interest rates from the near-zero rate it's run for the past seven years.

The local currency climbed to 93.53 Australian cents from 93.18 cents yesterday after the Reserve Bank of Australia's minutes to its last monetary policy review noted recent economic data had been positive, while saying there was still scope for lower rates.

The kiwi rose to 4.3893 Chinese yuan from 4.3309 yuan yesterday, and jumped to 82.13 yen from 81.26 yen. It increased to 61.65 euro cents from 61.20 cents yesterday, and climbed to 44.78 British pence from 44.15 pence.

BusinessDesk.co.nz

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