NZ dollar rises above 85 US cents as investors seek yield after ECB cuts rates

Friday 6th June 2014

The New Zealand dollar rose above 85 US cents overnight after the European Central Bank cut its benchmark interest rates to negative and introduced further stimulus, prompting investors to seek higher yields elsewhere.

The kiwi touched 85.13 US cents, its highest level this week, and was trading at 84.99 cents at 8am in Wellington, from 84.41 cents at 5pm yesterday. The Australian dollar rose to 93.38 US cents from 92.84 cents yesterday. The trade-weighted index advanced to 79.21 from 78.90 yesterday.

The New Zealand and Australian currencies advanced after the ECB became the first major central bank to charge fees on deposits and unveiled a 400 billion euro stimulus plan to support an economy threatened by deflation. A recent decline in the New Zealand dollar, which saw it touch a three-month low of 84 US cents this week, has made the local currency even more attractive for investors in an environment where the Reserve Bank is raising interest rates.

"The big story overnight is the ECB," said Stuart Ive, senior advisor at OMF. "This immediately makes fund managers in Europe start looking for yield somewhere. What is probably doubly attractive for the kiwi and the Aussie in this case is that because of the declines in the currencies as of late, it has made them even more attractive. New Zealand is still very much on a rate hiking basis and these funds have to park money. New Zealand is a golden choice."

Traders are betting there is a 91 percent chance that New Zealand's central bank will raise its benchmark interest rate for a third time this year at its meeting next week, and further hikes are expected at coming meetings, according to the Overnight Index Swap curve.

Later today, the focus will be on the US non-farm payrolls report for May and the kiwi could accelerate further should the number fall short of the 218,000 expected, said OMF's Ive.

The New Zealand dollar rose to 90.99 Australian cents from 90.90 cents yesterday ahead of a report today on Australian construction.

The local currency advanced to 62.23 euro cents from 62.05 cents yesterday, and touched an overnight week high of 62.59 cents. The kiwi increased to 50.56 British pence from 50.39 pence yesterday after the Bank of England kept its benchmark interest rate at a record low and its economic stimulus programme unchanged. The New Zealand dollar rose to 87.04 yen from 86.53 yen yesterday.

BusinessDesk.co.nz

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