NZ dollar heads for 1.1% weekly gain as interest rate advantage remains attractive

Friday 19th August 2016

The New Zealand dollar is heading for a 1.1 percent weekly gain against the greenback as the country's relatively high yields continue to attract investors in search of decent returns in a world where major central banks are running near-zero interest rate policies.

The kiwi rose to 72.70 US cents at 5pm in Wellington from 71.89 cents on Friday in New York last week. It was down from 72.91 cents at 8am and 72.88 cents yesterday. The trade-weighted index is heading for a 0.7 percent weekly gain, trading at 76.85 from 76.31 last week, and little changed from 76.80 yesterday.

Investors' expectations for future US rate hikes dimmed this week after minutes to the Federal Reserve's last policy meeting showed little desire to tighten. That's left New Zealand an attractive place for international investors with an economy enjoying booming tourism and building activity and a Reserve Bank yet to exhaust conventional monetary policy. The yield on New Zealand's 10-year government bonds at 2.23 percent remains more attractive than Australia's equivalent government bond which was recently at a yield of 1.93 percent and US 10-year Treasuries' yield of 1.55 percent.

"The kiwi is still at elevated levels and the Reserve Bank still won't like it, but until they lower rates, it's going to stay attractive," said Michael Johnston, senior trader at HiFX in Auckland. "Maybe if the US raises rates in December we'd get some limited movement towards that, but for it to be guaranteed, we need to close that interest rate differential."

New Zealand's two-year swap rates rose 3 basis points to 1.96 percent and 10-year swaps gained 3 basis points to 2.41 percent.

Government data today indicated New Zealand's record inflow of net migration may have peaked in July, while tourism numbers continued to boom. Separate figures showed international visitors increased their spending in New Zealand in the June year, while Reserve Bank data showed spending on credit cards rose in July.

The local currency rose to 95.06 Australian cents from 94.56 cents yesterday and slipped to 4.8285 Chinese yuan from 4.8311 yuan. It fell to 64.10 euro cents from 64.40 cents yesterday and declined to 55.30 British pence from 55.78 pence. The kiwi was unchanged at 72.92 yen from yesterday.

BusinessDesk.co.nz

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