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NZ dollar rises as US-China trade, Brexit tensions ease

Tuesday 22nd October 2019

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The New Zealand dollar continued to strengthen amid optimism that the US and China will reach some kind of trade agreement and that the worst Brexit option – Britain crashing out of the European Union without an agreement – has been ruled out.

The kiwi was trading at 64.25 US cents at 5:05pm in Wellington from 63.97 cents at 7:50am. The trade-weighted index was at 70.93 points from 70.65.

Although British Prime Minister Boris Johnson continues to push for a parliamentary vote on his EU exit deal, analysts now expect Britain will either exit the EU in an orderly fashion or, given the support for remaining in the EU, Brexit may not happen at all.

There are similarly positive signals coming from Washington on a trade deal with China.

“The deal with China’s coming along very well. They want to make a deal," US President Donald Trump told reporters on Monday.

Positive statements on the likelihood of the trade deal continue to underpin financial markets' more risk-tolerant mood, improving the fortunes of commodity-linked currencies such as the Australian and New Zealand dollars, says Robert Rennie, chief currency strategist at Westpac in Sydney.

"I tend to see this as a process that will continue to run through for the next few days," he says.

In addition to the global geopolitical tensions easing, stronger data in both Australia and New Zealand have shifted expectations about how much each country's Reserve Bank will cut interest rates.

Rennie says the next event on the horizon with the potential to move markets is a speech US Vice-President Mike Pence is giving about China on Thursday. There's some nervousness that he may say something that will upset the Chinese.

Pence has a history of condemning Beijing for its human rights record and militarisation of the South China Sea. There's no shortage of situations for Pence to comment on from China's treatment of the Uighur Muslims to the civil unrest in Hong Kong.

There are also concerns that the US may use capital controls to pressure China, given the vast majority of international transactions are completed in US dollars.

"Once you look at disrupting capital flows, the risks that we might see unintended consequences rises," Rennie says. "Certainly, China owns a lot of US Treasuries and has been a major funder" of the US government's burgeoning fiscal deficit.

The New Zealand dollar was trading at 93.47 Australian cents from 93.14 cents, at 49.50 British pence from 49.31, at 57.62 euro cents from 57.38, at 69.80 yen from 69.44, and at 4.5466 Chinese yuan from 4.5243.

The two-year swap rate edged up to a bid price of 0.9962 percent from 0.9509 late yesterday while the 10-year swaps rose to 1.4500 percent from 1.3975.


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