NZ dollar may gain as Trump uncertainty weighs on US rate hike view

Monday 22nd May 2017

The New Zealand dollar may gain against the greenback this week as investors question whether US President Donald Trump's fiscal policies will get bogged down in political scandal and weigh on the need for aggressive rate hikes by the Federal Reserve.

The kiwi edged up to 69.36 US cents as at 5pm in Wellington from 69.25 cents on Friday in New York. The trade-weighted index increased to 75.07 from 74.69 last week.

New Zealand's currency is recovering from an 11-month low against the greenback it reached this month as investors grow increasingly uneasy about Trump's ability to forge ahead with planned tax cuts and infrastructure spending since the sacking of FBI director James Comey and the ongoing investigation into the administration's pre-election links to Russia. The White House's fiscal plans had been seen as adding an inflationary stimulus to the economy at a time when the Fed was already keen to hike interest rates, and any barrier to that plan is seen as reducing the need for a more aggressive response by the US central bank.

"Trump firing the FBI director has created uncertainty enough to say, will he enact the policies, the tax reform and infrastructure spend, and the market's just losing a little bit of faith in the Trump reflation trade at the moment," said Graham Parlane, private client manager at OMF. "There's a little more potential for the kiwi to go a bit higher on the week - there's been reasonably negative sentiment around the kiwi for a while now as it loses its yield advantage, but with this US dollar turning turtle, that sentiment could easily unwind."

Still, OMF's Parlane still expects the long-term trend to be in the US dollar's favour with the Fed moving away from the extraordinary stimulus it pumped into the economy in response to the global financial crisis almost a decade ago. Minutes to the Fed's last policy review are due on Thursday, and the central bank is still widely expected to raise the federal funds rate at next month's meeting.

Domestically, Fonterra Cooperative Group's opening forecast for the 2018 farmgate payout will be watched on Wednesday, as will the government's budget the following day, which is likely to show a strong set of accounts.

New Zealand's two-year swap rate increased 2 basis points to 2.24 percent, and 10-year swaps gained 4 basis points to 3.25 percent.

The local currency rose to 77.33 yen from 77.05 yen last week and gained to 4.7774 Chinese yuan from 4.7665 yuan. It increased to 61.97 euro cents from 61.54 cents last week and rose to 53.36 British pence from 53.12 pence. The kiwi gained to 93.21 Australian cents from 92.78 cents last week.

(BusinessDesk)

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