NZ dollar falls as rising US bond yields drive up greenback

Friday 28th October 2016

The New Zealand dollar fell amid a global selloff in bonds, paced by US Treasuries, that pushed the yield on the 10-year benchmark US bond to a five-month high and drove up the greenback.

The kiwi fell to 71.36 US cents as at 5pm in Wellington from 71.51 cents late yesterday. The trade-weighted index was little changed at 77.07.

The yield on 10-year US Treasuries rose as high as 1.87 percent overnight, the highest since late May according to Reuters data, after stronger-than-expected UK economic growth figures. Bonds have been declining, pushing yields higher, amid speculation central banks are nearing the end of their stimulus measures.

"What's been driving it all week has been the stronger US dollar and that's been based on higher US bond rates," said Tim Kelleher, head of institutional foreign exchange sales at ASB Bank. "The market has finally twigged that central bank quantitative easing is going to be less across the board, maybe with the exception of Japan."

Kelleher expects the kiwi to "slowly drift off" against the US dollar, with the greenback broadly stronger and expectations of a Reserve Bank of New Zealand rate cut next month. Still, the kiwi may struggle to push through 69.5 US cents or even the psychological level of 70 cents unless something triggers investors to be more wary of risk, such as a selloff in US stocks, ahead of the RBNZ's meeting on Nov. 10.

The yield on New Zealand's 10-year government bonds reached 2.73 percent, the highest since late May. New Zealand's two-year swap rate rose 1 basis point to 2.11 percent while 10-year swaps jumped 8 basis points to 2.81 percent, the highest since June 23.

Traders are now awaiting US GDP figures for the third quarter, due on Friday, which are expected to show annualised growth accelerated to 2.5 percent from 1.4 percent, adding to the rationale for an interest rate hike from the Federal Reserve in December.

In New Zealand next week labour market data and the Reserve Bank's survey of expectations will show whether wage inflation is emerging and whether expectations of low inflation are becoming entrenched.

The kiwi traded at 58.59 British pence from 58.54 pence late yesterday and slipped to 4.8382 yuan from 4.8462 yuan late yesterday when the yuan was fixed at a six-year low of 6.7921 yuan per US dollar.

It dropped to 65.44 euro cents from 65.61 cents and rose to 75.03 yen from 74.68 yen. It gained to 93.97 Australian cents from 93.76 cents yesterday.

BusinessDesk.co.nz

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