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NZ dollar at 18-month high vs euro on ECB extension, seen weaker as yield premium shrinks

Friday 9th December 2016

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 The New Zealand dollar rose to an 18-month high against the euro after the European Central Bank extended its asset purchase programme but is seen at more risk of falling against the greenback as its yield advantage shrinks.

The kiwi dollar traded at 67.56 euro cents as at 5pm in Wellington and earlier touched 67.73 cents, the highest since May 2015, from 66.89 cents late yesterday. The local currency fell to 71.69 US cents from 72.10 cents yesterday as the ECB's decision also helped lift the greenback.

Both the kiwi and the Australian dollar gained against the euro on the prospect of European stimulus helping global growth at a time the US economy is picking up. ECB President Mario Draghi surprised financial markets by extending the bank's bond-buying programme longer than expected to the end of 2017, while trimming the overall target to 60 billion euros a month from 80 billion euros starting April. At question time he indicated there was no thought at the central bank to ending the programme early. 

"There'll be a bit more stimulus in the world from the Euro zone" which has helped the kiwi to be "relatively better bid", said Graham Parlane, private client manager at OMF. 

Parlane sees the kiwi declining against US dollar to below its recent range of about 70 US cents to 73 cents "eventually" as New Zealand's yield advantage shrinks. He cited a 325 basis point premium for the official cash rate against the Federal Reserve's key rate in May 2015. The premium has since narrowed to 1.25 basis points and is set to shrink further next week, when the Fed is widely expected to hike the rate.

"We're not the high yielder we were for most of the time in the 2000s," Parlane said.

The kiwi was little changed at 96.06 Australian cents, having climbed to a month high of 96.36 cents yesterday, as the Treasury's stronger economic growth forecasts and Wheeler's upbeat comments contrasted with views of the Australian economy, which shrank a greater-than-expected 0.5 percent in the third quarter.

The trade-weighted index was at 78.77 from 78.86 yesterday. The kiwi dollar was little changed at 56.91 British pence, fell to 4.9459 yuan from 4.9586 yuan and rose to 81.99 yen from  81.77 yen.

The two-year swap rate rose 2 basis points to 2.25 percent and the 10-year swap rate jumped 7 basis points to 3.35 percent.

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