NZ dollar heads for decline as Fed's Yellen talks up rate hikes this year

Friday 25th September 2015

The New Zealand dollar is heading for a 0.9 percent decline against the greenback this week as US Federal Reserve chair Janet Yellen said she favoured a rate hike this year in a slow return to normality.

The kiwi fell to 63.38 US cents at 5pm in Wellington from 63.93 cents on Friday in New York last week. It was down from 63.56 cents at 8am, though still up from 62.91 cents yesterday. The trade-weighted index rose to 69.17 from 68.67 yesterday, and is heading for a 0.8 percent gain, as the prospect for a rate cuts in Australia weighed on that nation's currency and the euro fell amid concerns the Volkswagen emissions scandal would drag on German auto exports.

The Federal Open Market Committee kept the federal funds rate between zero and 0.25 percent when it reviewed policy last week, citing global market volatility and a subdued inflation environment. In a speech Amherst, Massachusetts, Yellen said she and most of her colleagues expected rates to rise this year, in what will be a gradual move to normalised monetary policy.

That took the wind out of the kiwi dollar which got a boost yesterday from Fonterra Cooperative Group raising its forecast payout to farmers from what would have been a decade-low. That eased fears a slowdown in the dairy sector, which produces New Zealand's biggest export commodity, would weigh on economic growth.

"Yellen took a little wind out of the kiwi's sales," said Sam Tuck, senior FX strategist at ANZ Bank in Auckland. "We're relatively comfortable with the kiwi trading between 62 and 65 (US cents)."

Tuck said the kiwi will probably remain in that range until the Fed starts raising interest rates, or if contracting global trade and uncertainty in emerging markets end up sparking widespread volatility.

The local currency also got a boost with Australia & New Zealand Banking Group economists changing their view on Australia's rate track, calling for two more rate cuts by the central bank, increasing the kiwi's trading activity with a more attractive asset. The kiwi rose to 90.39 Australian cents from 88.83 cents yesterday.

The kiwi was little changed at 76.17 yen from 76.27 yen yesterday, and traded at 4.0408 Chinese yuan from 4.0416 yuan. It climbed to 56.74 euro cents from 56.19 cents yesterday, and advanced to 41.61 British pence from 41.33 pence.

New Zealand's two-year swap rate climbed 5 basis points to 2.73 percent at 5pm in Wellington, and the 10-year swap advanced 3 basis points to 3.56 percent.

BusinessDesk.co.nz

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