NZ dollar holds above 65 US cts as upbeat data pushes up US bond yields

Wednesday 12th September 2018

The New Zealand dollar held above 65 US cents as an upbeat US business survey supported expectations that the Federal Reserve will raise interest rates, making US bonds more attractive than their Kiwi counterpart.

The local currency fell as low as 65.02 US cents and traded at 65.15 cents at 8am in Wellington from 65.26 cents yesterday. The trade-weighted index was at 71.05 from 71.13 yesterday.

The yield on US 10-year Treasury notes increased 4 basis points to 2.98 percent after the NFIB small business survey showed optimism hit a record in August. Separate data reported job openings reached an all-time high 6.9 million in July.

Investors have fully priced in a rate hike by the Fed this month, in contrast to the New Zealand Reserve Bank where a rate cut is seen as a 50/50 chance during the coming year. The US 10-year government bond yield is now 38 basis points above its New Zealand counterpart, the widest spread in favour of the US in at least 20 years, according to Reuters data.

"The US economic backdrop at present remains very supportive of further Fed tightening, and the market has upped its probability for a December hike to above 80 percent and increased rate hike pricing for 2019 to 42 basis points," Bank of New Zealand senior markets strategist Jason Wong said in a note. "Interest rate differentials also continue to move unfavourably for the NZD; the two-year NZ-US swap differential is almost -100 basis points - a record low."

Globally, investors are waiting for US President Donald Trump's decision on whether to impose tariffs on another US$200 billion of Chinese imports. The trade ructions between the US and China have weighed heavily on New Zealand and Australia, which both count the Asian economy as their biggest export destination.

China's ability to respond in kind to US tariffs is limited due to its trade surplus with the world's biggest economy. AP reported the US-China Business Council representatives have been told by Chinese Cabinet-level officials licence applications by US firms in financial services and other industries are being delayed until the nations settle their dispute. The kiwi slipped to 4.4768 Chinese yuan from 4.4795 yuan yesterday and was little changed at 91.57 Australian cents form 91.62 cents.

Local data today include the July accommodation survey.

The kiwi was almost unchanged at 72.70 yen from 72.71 yen yesterday and traded at 56.19 euro cents form 56.25 cents. It held near a two-and-a-half year low 50.04 British pence from 50.06 pence yesterday.

(BusinessDesk)

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