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NZ dollar falls as prospect of new Fed chair stokes rate hike bets; Catalonia vote weighs on euro

Monday 2nd October 2017

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The New Zealand dollar slipped as the greenback benefitted from the possibility a new Federal Reserve chair could tighten monetary policy faster than the current regime and as the euro was weighed on by uncertainty over the Catalonia independence vote. 

The kiwi traded at 71.96 as at 5pm versus 72.14 US cents as at 8am in Wellington from 72.05 cents in New York on Friday. It was little changed at 61.09 euro cents from  61.02 cents last week. 

The greenback gained as investors interpreted US President Donald Trump's meeting with former Federal Reserve governor Kevin Warsh, who is considered more hawkish than current Fed chair Janet Yellen, as a pathway to faster increases in interest rates. Trump also met with Yellen, National Economic Council director Gary Cohn, Fed board governor Jerome Powell, and meetings with additional candidates are also reportedly in the works. Trump will decide within three weeks whether to reappoint Yellen or replace her, Bloomberg reported. 

The US dollar was also buoyed by a weak euro after an independence vote in Spain’s Catalonia created a political and constitutional crisis. According to the leaders of Catalonia, the vote was in favour of independence, but was boycotted by opponents. The euro was down around 0.3 percent against the US dollar in Asia to US$1.1776. 

The kiwi's weaker against the greenback but it's not down "to anything else other than US dollar strength," said Martin Rudings, a senior dealer at OMF. The domestic political situation was not hurting the New Zealand dollar as "the market is starting to accept that the downside for the kiwi from the political situation is not really happening."  Anyone selling kiwi is likely to be disappointed and it could even squeeze higher although "it's fate is down to the US dollar," he said. 

Rudings noted that investors remain upbeat about US tax reforms announced by Trump, which will provide growth and stimulus "but paying for it is the big question mark."

Looking ahead, traders will be watching for tomorrow's Reserve Bank of Australia rate review, where the central bank is expected to keep rates steady again, followed by the GlobalDairyTrade auction overnight Tuesday. Rudings said OMF is expecting dairy prices to lift about 5 percent as the whole milk powder futures are pointing to an improved result. 

The kiwi traded at 81.19 yen from 81.26 yen after data showed Japan’s big manufacturers were the most confident about the business outlook in a decade in the last quarter. The local currency was at 91.96 Australian cents from 91.94 cents, at 4.7877 yuan from 4.7984 yuan and at 53.81 British pence from 53.91 pence. 

The trade-weighted index was at 76 from 75.98 last week.

The two-year swap rate rose 1 basis point to 2.21 percent and 10-year swaps rose four basis points to 3.29 percent. 


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