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NZ dollar recovers from Fed's Yellen talking up early rate hike

Wednesday 15th February 2017

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The New Zealand dollar was little changed, recovering from an earlier decline as the country's robust economic outlook trumped heightened expectations for an early US rate hike following comments by Federal Reserve chair Janet Yellen.

The kiwi was trading at 71.73 US cents as at 5pm versus 71.55 cents as at 8am and 71.75 cents yesterday. The trade-weighted index was at 78.11 from 78.17.

"It was just really a grind higher after a weaker night," said ANZ Bank New Zealand senior economist Philip Borkin. The kiwi fell overnight after Yellen basically left March "on the table" for a possible rate hike, said Borkin.

While the US dollar remained supported during the Asia trading session after Yellen told a US Senate Committee that "waiting too long to remove accommodation would be unwise, potentially requiring the FOMC (Federal Open Market Committee) to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession," the kiwi bounced off support levels, he said.

The US dollar will remain a key driver, but "it's hard to paint a very bearish picture for the New Zealand dollar at the moment" given the strong economic backdrop in New Zealand, he said. Recent data, such as this week's food price figures and retail card spending point to inflationary pressure while migration, tourism and other numbers remain strong.

Bank of New Zealand currency strategist Jason Wong said global forces also remain supportive for the New Zealand dollar. "Global growth momentum is improving and world output is on track to record its strongest growth in five years; global commodity prices are recording strong gains," said Wong. Given that the global conditions "aren't likely to diminish overnight" the New Zealand dollar will remain a "strong currency," he said.

However, while a trading range of 70-to-74 US cents is likely to be in force over the next few months, once the Fed resumes hiking and US President Donald Trump's tax reform package is announced, "a more meaningful downtrend is expected to develop." BNZ has a year-end target of 67 US cents.

The kiwi rose to 57.52 British pence from 57.24 pence yesterday and was little changed 67.74 euro cents from 67.67. It traded at 93.42 Australian cents versus 93.52 late yesterday and gained to 81.96 yen from 81.48 yen yesterday. The kiwi slipped to 4.9233 Chinese yuan from 4.9354 yuan.

New Zealand's two-year swap fell 1 basis point to 2.32 while 10-year swaps rose 4 basis point to 3.49.

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