NZ dollar may extend decline as investors unnerved by govt policy 'vacuum'

Thursday 26th October 2017

The New Zealand dollar is vulnerable to more downside as investors await more detail on the new government's policies and as the US dollar gains.

The kiwi was trading at 68.88 US cents as at 5pm from 68.68 US cents as at 8am in Wellington from 68.88 cents late yesterday. The trade-weighted index was at 72.88 from 72.98 yesterday.

The greenback has rallied over the past week on optimism US tax reforms may stoke economic activity and speculation that the next chair of the US Federal Reserve could steer policy in a more hawkish direction.

At the same time the, New Zealand dollar has been hit by unease over the lack of detail on the new government's domestic policy programme. Newly sworn-in Prime Minister Jacinda Ardern today pledged to lead an "active government" for all New Zealanders.

The kiwi "is still looking vulnerable and I suppose we are in a policy detail vacuum and we will remain so, especially while we have the Reserve Bank Act under change," said Martin Rudings, senior dealer foreign exchange at OMF in Wellington. While he doesn't expect significant changes to the act, uncertainty is weighing on the currency, he said.

Trading in the local currency will continue to be volatile and "while we are expecting clarity going forward from the new government, it will likely be in fits and bursts rather than all delivered at once," he said.

Rudings said the kiwi is also weighed down by the stronger US dollar and if US President Donald Trump manages to push through tax reform "that will keep a lid on the kiwi-US cross."

Looking ahead, Rudings said investors will be watching for any details of the European Central Bank’s plans for scaling back its bond-buying stimulus programme. While the euro is likely to lift on the news, any reduction in the monthly amount of asset purchases may come with a lengthy extension of the programme given the tepid inflation backdrop, which "will take some of the sting out of the currency," he said. The kiwi declined to 58.24 euro cents from 58.59 cents.

The local currency traded at 89.33 Australian cents from 89.21 cents yesterday and at 4.5671 yuan from 4.5754 yuan late yesterday. It fell to 51.91 British pence from 52.44 pence and declined to 78.19 yen from 78.48 yen yesterday.

New Zealand's two-year swap rate was unchanged at 2.16 percent and 10-year swaps rose 2 basis point to 3.22 percent.

(BusinessDesk)

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