NZ dollar drops to six year low as traders drive China's yuan lower

Wednesday 12th August 2015

The New Zealand dollar dropped to a six year low as investors latched onto a new regime in China where regulators will let the yuan trade more freely, devaluing the currency and putting pressure on nations which export to the world's second biggest economy.

The kiwi fell as low as 64.70 US cents, trading at 64.87 cents at 5pm in Wellington from 65.42 cents at 8am and 65.52 cents yesterday. The local currency advanced to 4.1695 Chinese yuan from 4.1396 yuan yesterday.

China's currency extended its decline after markets were allowed to take it lower for a second day following the People's Bank of China's decision yesterday to depreciate the yuan and allow for more market influence in setting the daily fix. The move weighs on nations such as Australia and New Zealand which rely heavily on China to buy their products, as the value of export receipts diminishes.

"What they're essentially doing is a managed free float," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand in Auckland. "The assumption at the moment is China requires a lower currency rate because the market is telling us that, and that means Chinese demand is going to remain weak, therefore the Aussie and kiwi are being sent lower."

ANZ's Tuck said the offshore yuan rate indicated there was scope for another depreciation tomorrow, which will continue to weigh on the kiwi dollar, though "it's going to be a law of diminishing returns" in terms of the effect.

Traders will be watching for Chinese industrial production and retail sales figures out later today, and a speech by US Federal Reserve official William Dudley.

New Zealand's currency has already been on the decline as the Reserve Bank goes into a period of looser monetary policy as falling dairy prices weigh on the terms of trade.

The two year swap rate fell to 2.83 percent from 2.86 percent yesterday, and 10 year swaps dropped to 3.57 percent from 3.64 percent.

The local currency gained to 89.60 Australian cents 89.44 cents yesterday, and fell to 81.19 yen from 81.68 yen. It dropped to 58.56 euro cents from 59.67 cents yesterday, and fell to 41.69 British pence from 41.97 pence. The trade-weighted index decreased to 70.19 from 70.32 yesterday.

BusinessDesk.co.nz

Comments from our readers

No comments yet