NZ dollar falls below 73 US cents, gains vs yen as BOJ reworks strategy

Wednesday 21st September 2016

The New Zealand dollar fell below 73 US cents and gained against the yen after the Bank of Japan amended its monetary policy, prompting traders to sell the Japanese currency in favour of the greenback.

The kiwi fell to 72.85 US cents as at 5pm in Wellington from 73.23 cents late yesterday. The local currency rose to 74.80 yen from 74.55 yen.

The BOJ surprised financial markets by scrapping its base money target and focus on setting long-term interest rates, buying long-term bonds to keep the 10-year yield around 0 percent. At the same time, it kept the -0.1 percent interest rate it applies to reserves that financial institutions leave with the BOJ and maintained its target of buying long-term government bonds at a pace that would increase its holdings by 80 trillion yen a year.

Some traders said it has some of the hallmarks of former Federal Reserve chairman Ben Bernanke's 'Operation Twist' only in reverse, a reference to the Fed's 2011 manoeuvre to use the proceeds from sales of short-term Treasury bills to buy long-term Treasury notes to drive down long-term interest rates.

"This appears to be 'operation reverse twist'," said Graham Parlane, private client manager at OMF. "It's trying to drive the front end even more negative while lifting the back end."

Parlane said the changes were "a difficult one to interpret" but it was "an attempt to foster inflation and growth in Japan." The market "is giving them the benefit of the doubt at the moment."

The Bank of Japan's statement drove traders back to the greenback ahead of the results of the Fed's latest policy meeting on Thursday morning New Zealand time. Currencies including the kiwi also fell against the US dollar as a result.

The trade-weighted index dropped to 77.79 from 78.09 late yesterday. In the local market, traders are also awaiting the Reserve Bank's interest rate review at 9am tomorrow, which is expected to keep the official cash rate at 2 percent while signalling a quarter point cut before the end of the year.

Also out tomorrow is Fonterra's annual results, although the revised forecast announced today was a key part of the news.

The kiwi fell to 96.59 Australian cents from 96.99 cents yesterday and slipped to 4.8606 yuan from 4.8834 yuan. It was little changed at 65.478 euro cents from 65.32 cents and little changed at 56.16 British pence from 56.15 pence.

New Zealand's two-year swap rate fell 1 basis point to 2.09 percent, and 10-year swaps increased 1 basis point to 2.63 percent.

BusinessDesk.co.nz

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