NZ dollar gains as dairy prices, high rates draw investors

Thursday 8th September 2016

The New Zealand dollar rose, having climbed above 79 on a trade-weighted basis for the first time in 17 months, as the rebound in dairy prices and relatively high-interest rates, combined with softer data out of the US helped drive investors to the local currency.

The kiwi traded at 74.57 US cents as at 5pm in Wellington, having reached 74.79 cents overnight, the highest since May last year, from 74.30 cents late yesterday. The trade-weighted index rose to 78.84 from 78.51 and reached 79.05 overnight or about 4 percent above the average 76 level the Reserve Bank has projected for the third quarter.

Whole milk powder prices at the GlobalDairyTrade auction this week extended their rally to reach the highest level since October last year amid signs a global supply imbalance is easing. Economists are expecting figures next week to show the economy accelerated in the second quarter, driven by a rebound in agriculture and continued strong construction activity, adding lustre to the New Zealand story but also building the case for the Reserve Bank to act quickly in cutting interest rates again.

"The kiwi has been strong across the board," said Michael Johnston, senior trader at HiFX. "It has been a one-two punch with disappointing US data and strong dairy numbers. If I was sitting at the Reserve Bank I would be seriously considering cutting interest rates at the review this month. The market is not expecting that so you'd get more bang for your buck."

Traders are betting governor Graeme Wheeler will wait until the next full monetary policy statement on Nov. 10 rather than cut the official cash rate a quarter point to 1.75 percent at its review on Sept. 22.

The kiwi traded at 97.12 Australian cents from 96.81 cents late yesterday when figures showed Australian second-quarter gross domestic product missed expectations, growing 0.5 percent in the three months ended June. Johnston said the kiwi may also be gaining against its trans-Tasman counterpart on perceptions New Zealand's soft commodities are faring better on world markets than Australia's minerals such as iron ore and coal.

Overnight, the Federal Reserve's Beige Book showed most US districts reported a "modest" or "moderate" pace of overall growth, and Bank of England Governor Mark Carney downplayed signs of strength in the UK economy while keeping the door open for further easing. By contrast, figures yesterday showed New Zealand manufacturing sales rose in the second quarter, turning from a decline in the first quarter, led by meat and dairy, the latest in a series of relatively sturdy data.

The New Zealand dollar advanced to 55.88 British pence from 55.40 pence late yesterday and rose to 75.73 yen from 75.36 yen. It gained to 4.9721 yuan from 4.9536 yuan and increased to 66.30 euro cents from 66.02 cents.

New Zealand's two-year swap rate fell 1 basis point to 1.96 percent at 5pm in Wellington, and 10-year swaps declined 1 basis points to 2.38 percent.

BusinessDesk.co.nz

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