Kiwi down as US bonds sold
The NZ dollar fell as a sell- off in US bonds, on what is expected to be more stimulatory US government policy under Donald Trump, eroded the yield premium on kiwi assets and demand for the carry trade.
The kiwi fell to US71.99c from US72.66c late on Thursday. The trade- weighted index dropped to 77.96 from 78.21.
In the carry trade, investors borrow in a currency that offers low interest rates to buy a currency that has higher interest rates. The yield on five- year US Treasuries has jumped 31 basis points in the past week to reach 1.55 per cent, while the yield on five- year New Zealand government bonds has risen 17 basis points to 2.49 per cent
Stocks on Wall Street rose overnight on Thursday, with the Dow Jones Industrial Average touching a record high amid bets that President- elect Donald Trump will spend more and regulate less after campaign promises including US$ 550 billion ($ 763b) of new infrastructure, to lift economic growth and create jobs. The US dollar index touched its highest level in more than two weeks. The market has 85 per cent odds that the Federal Reserve will raise interest rates next month.
“The kiwi has been caught in two quite interesting cross- currents,” said Sheldon Slabbert, sales trader at CMC Markets. “The kiwi i s a sentiment- driven currency and markets right now are taking a ‘ glass- half- full’ approach. What’s overpowering that is bond rates have gone up and the spread versus New Zealand is getting squeezed. Obviously, that diminishes the appeal of the carry trade. People are anticipating more capital will be attracted to the US.”
The Reserve Bank’s cut to the official cash rate on Thursday, to a record low 1.75 per cent, is seen as the bottom of the easing cycle although the bank’s projection for the OCR implies a 20 per cent chance of another cut.
“The Reserve Bank has put us in a slightly divergent monetary policy versus other central banks,” Slabbert said. “The US i s more or less locked into a hike in December and more to come next year. I see some weakness for the kiwi near term.”
The local currency rose to ¥ 76.70 from ¥ 76.40 on Thursday and rose to A94.80c from A94.69c. It fell to 4.9074 yuan from 4.9306 yuan, declined to 57.35 British pence from 58.45p and slipped to 66.03c from
66.32c.