NZ dollar little changed ahead of Fed meeting where a rate hike is priced in

Monday 12th December 2016

The New Zealand dollar was little changed against the greenback ahead of this week's Federal Reserve policy meeting, which is expected to see a hike in the federal funds rate and potentially a stronger forecast track for economic growth.

The kiwi dollar traded at 71.44 US cents as at 5pm in Wellington, little changed from 71.39 cents in late New York trading on Friday. The trade-weighted index was at 78.66 from 78.53 at the end of last week.

Financial markets are certain the Fed will hike this week and signal further increases next year. What's less certain is the degree to which the Fed will take into account US president-elect Donald Trump's pledges to cut taxes while ramping up spending on infrastructure, fuelling economic growth and inflation. The US dollar index reached a 16-year high of 102.05 last month, before retreating, but has since strengthened again since the European Central Bank extended its bond-buying programme last week.

"The market isn't going into this week expecting to see a decent spike in volatility" in kiwi-US, which means it is at risk of being surprised, said Chris Weston, chief market strategist at IG Markets. There is still a question market over whether the Fed will "take some of this political hope" priced into US markets and reflect that in its forecasts.

Weston said traders will be watching the Fed's GDP forecasts and its projections for the fed funds rate. Any increases would likely be for 2018 "if they genuinely believe the reflation story," he said. A more aggressive stance on monetary policy would indicate "the US dollar bull story has further to run."

The kiwi didn't move much after government figures showed wholesale trade rose 1 percent in the third quarter and when Bill English was confirmed as prime minister. Moody's Investors Service said in a report today that New Zealand's strong public finances have given it significant flexibility to deal with negative shocks and it expects further economic reforms under English. It kept the credit rating at Aaa with a stable outlook.

The kiwi dollar traded at 67.63 euro cents from 67.61 cents in New York, where it earlier touched 67.93 cents, the highest since May 2015, reflecting the announcement last week that the ECB's stimulus programme would run until the end of 2017.

The New Zealand dollar traded at 95.58 Australian cents, down from 95.75 cents in New York last week and from 96.06 cents in Wellington on Friday.

The kiwi dollar traded at 56.83 British pence from 56.73 pence in New York on Friday. It rose to 4.9496 yuan from 4.9261 yuan and gained to 82.40 yen from 82.22 yen.

The two-year swap rate rose 3 basis points to 2.28 percent and the 10-year swap rate jumped 7 basis points to 3.42 percent.

BusinessDesk.co.nz

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