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NZ dollar falls on tepid economic growth, rising greenback

Thursday 21st June 2018

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The New Zealand dollar lost further ground against the greenback as today's gross domestic product data added to recent weak data and as the US dollar continued to push higher in Asian trading on the prospect of interest rate rises in the US and easing trade jitters.  

The kiwi dollar fell to 68.37 US cents as at 5pm in Wellington from 68.60 cents at 8am and 69.01 cents late yesterday. The trade-weighted index fell to 72.83 from 73.33.

The local currency dipped after Statistics New Zealand said economic growth eased slightly in line with expectations in the first quarter as a fall in construction activity was offset by growth in the services industries. GDP expanded 0.5 percent in the three months to March 31 versus a revised 0.6 percent expansion in the fourth quarter. While not a surprise, the tepid data "didn't help when sentiment has turned toward the NZD, confidence data fell yesterday, the GDT auction was weaker ... and inflation still missing in action," said Ross Weston, a senior trader at Kiwibank, 

However, "that's really a sideshow to the strengthening USD," he said. Among other things, the greenback is benefiting from better US growth data and the Federal Reserve's interest rate outlook," he said. Overnight, Fed chair Jerome Powell said the case for continuing to raise interest rate hikes is "strong" in a speech at an ECB Forum on Central Banking. 

"With unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong," he said. His remarks sparked an increase in US Treasury yields, which added to the greenback's allure. 

Risk aversion also looks to have receded slightly in Asian trading, largely due to the absence of any further tariff threats from US President Donald Trump. 

Looking ahead, Weston said the kiwi has momentum lower. He noted that next week's central bank rate review "will outline a bank firmly on hold versus the Fed inclined to do more." The kiwi could easily track down toward 67.50 US cents, he said, "but we are at the mercy of the big dollar." 

Capital Economics said Thursday it expects the Reserve Bank to leave the official cash rate at 1.75 percent at next week's review and governor Adrian Orr may well repeat that rates will stay at this level for “some time to come”. But "with GDP growth likely to fall short of the RBNZ’s projections and inflation set to remain subdued, we anticipate that rates will remain on hold for even longer than the RBNZ or the financial markets currently expect. We suspect that the first rate rise may not occur until 2020." 

The kiwi fell to 92.84 Australian cents from 93.31 cents yesterday. It declined to 4.4375 yuan from 4.4693 yuan and dropped to 75.63 yen from 76.02 yen. It fell to 59.12 euro cents from 59.64 cents and declined to 51.97 British pence from 52.44 pence.

New Zealand's two-year swap rate lifted 1 basis point to 2.25 percent and 10-year swaps rose 4 basis point to 3.14 percent.


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