NZ dollar touches 2 1/2-week high after Fed keeps rates on hold

Friday 18th September 2015

The New Zealand dollar spiked to a two and a half week high after the Federal Reserve kept interest rates on hold, citing turmoil in global financial markets as threatening the world's biggest economy, and lowering the track of future hikes.

The kiwi rose as high as 64.44 US cents, trading at 63.49 cents at 8am, up from 63.36 cents before the meeting, though down from 63.61 cents yesterday. The trade-weighted index fell to 68.42 from 68.74 yesterday.

The Federal Open Market Committee kept the federal funds rate at between zero and 0.25 percent, saying "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," and lowered its projections for the benchmark rate. The kiwi initially climbed after the announcement before paring those gains as traders grew wary of currencies exposed to emerging markets, such as the New Zealand and Australian dollars.

"Unequivocally, the Fed was on the cautious side of things," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand in Auckland. "They're clearly concerned about the global environment and that's not good for a small open commodity producer (like New Zealand) and it's also not good for Australia and the idea that risk currencies are exposed to the source of instability at the moment ... and you shouldn't necessarily buy those currencies against the US dollar on this."

Investors preferred buying yen and euro after the Fed decision, and the kiwi fell to 76.18 yen from 76.73 yen yesterday, and dropped to 55.60 euro cents from 56.31 cents. It fell to 40.73 British pence from 41.02 pence yesterday.

ANZ's Tuck said the Fed's lower projections for rate hikes and inflation will also feed into the thinking of other central banks, such as New Zealand's Reserve Bank, which is in an easing cycle after falling milk prices eroded the nation's terms of trade.

Traders will be watching a consumer confidence survey in New Zealand to gauge household sentiment today, after government figures yesterday showed a slower pace of economic growth in the June quarter.

The kiwi was little changed at 88.50 Australian cents from 88.49 cents yesterday, and slipped to 4.0415 Chinese yuan from 4.0523 yuan.

BusinessDesk.co.nz

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