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NZ dollar becalmed ahead of OCR decision, China-US trade talks

Monday 25th March 2019

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The New Zealand dollar is little changed ahead of the Reserve Bank’s latest official cash rate review on Wednesday.

Traders are also awaiting more news from the United States-China trade talks which resume in Beijing this week and move to Washington next week.

The kiwi traded at 68.76 US cents at 5pm in Wellington from 68.73 cents at 8:30am. The trade-weighted index was at 74.50 from 74.49.

Peter Cavanaugh, the senior client advisor at Bancorp Treasury Services, says the currency traded a tight 14-point range against the US dollar today and the real story today was how low longer-term interest rates have fallen.

The two-year swap rate was unchanged from Friday at 1.7728 percent while the 10-year swap rate was also unchanged at 2.2200 percent. However, earlier today, the 10-year swap rate reached a record low at 2.16 percent.

New Zealand's longer-term yields are easing in the wake of yields in the US. The three-month US Treasury yield was recently quoted at 2.4527 percent, above the 10-year Treasury bond yield of 2.439 percent. The 10-year Treasury yield has dropped from 2.7990 percent on Jan. 18.

That inversion is a classic signal that the US economy may be headed into recession but not everybody is convinced that’s what it means this time around.

Cavanaugh says the New Zealand market is pricing in a rate cut next year while it has fully priced-in a cut by the Reserve Bank of Australia in September and the chance of a second RBA cut by the end of the year. The US market is pricing in a rate cut there for this time next year.

The US market is now more convinced that the Federal Reserve had good reason for switching from being hawkish last year, when it had three interest rate hikes pencilled in for this year, to being dovish after New Year. It now says no rate hikes are likely this year.

Reinforcing the reasons for the Fed’s about-face, data on Friday showed US manufacturing activity fell to a 21-month low in March.

The New Zealand dollar is creeping closer to parity with the Australian dollar, rising to 97.13 Australian cents from 97.08 this morning.

“That’s because the market’s more confident about interest rate cuts in Australia this year than they are in New Zealand,” Cavanaugh says.

The kiwi was at 52.13 British pence from 51.95, at 60.86 euro cents from 60.82, at 75.54 yen from 75.47 and at 4.6167 Chinese yuan from 4.6160.


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