NZ dollar may extend decline vs euro as carry trade loses lustre

The New Zealand dollar may extend its decline against the euro and other cross-rate currencies on concern the carry trade - where investors borrow at low interest rates to buy higher-yielding assets - will be eroded by US rate hikes as soon as next month. 

The kiwi fell to an 11-month low 61.99 euro cents and was trading at 62.09 cents as at 5pm in Wellington from 62.59 cents yesterday. It increased to 68.96 US cents from 68.61 cents yesterday. 

Currencies including Japan's yen, the British pound and euro gained against the greenback with growing concerns US President Donald Trump will struggle to enact major tax reform and drive a trillion-dollar infrastructure spend, removing an expected boost that's seen driving up interest rates in the US. However, the kiwi and Australian dollars were more muted as investors still expect the Federal Reserve to raise interest rates whereas the Antipodean central banks aren't seen budging on rates for the foreseeable future, reducing the interest rate advantage of the South Pacific nations. 

"We've had nine years of buoyant carry trade, and now all the reasons for wanting them are gone, and the corporates holding them are slowly coming to the realisation and exiting them," said Martin Rudings, senior dealer foreign exchange at OMF in Wellington. "We're seeing quite a lot of unwinding of the kiwi/euro, kiwi/Sterling, kiwi/yen and Aussie/yen as well, which should keep a cap on the kiwi and the Aussie." 

The kiwi traded at 53.32 British pence from 53.29 pence yesterday and dropped to 77.60 yen from 78.09 yen. The trade-weighted index was unchanged at 74.86. 

The local currency didn't react strongly to an unexpected increase in whole milk powder prices at the latest GlobalDairyTrade event or data showing a pick-up in producer prices led by the recovery in dairy prices. 

New Zealand's two-year swap rate was unchanged at 2.22 percent and 10-year swaps fell 2 basis points to 3.27 percent. 

The kiwi was little changed at 92.90 Australian cents from 92.84 cents yesterday after Standard & Poor's affirmed Australia's rating at AAA, while retaining its 'negative' outlook, questioning the federal government's ability to meet its return to surplus by 2020/21. 

The local currency increased to 4.7493 Chinese yuan from 4.7410 yuan yesterday. 

(BusinessDesk)