Expected US rate hikes dampen kiwi

The New Zealand dollar is heading for a 1.2 per cent weekly fall as the greenback comes back in favour after minutes from the US Federal Reserve cemented the view that it will lift interest rates at least three times this year, while NZ’s central bank remains firmly on hold.

The kiwi fell to US73c as at 5pm yesterday from US73.88c last Friday in New York, and was little changed from US73.08c on Thursday. The trade-weighted index fell to 75.01 from

75.21 on Thursday.

The Fed started tightening its ultra-loose policy at the end of 2015 after keeping rates on hold for almost a decade. It raised interest rates three times in 2017 and investors expect it to tighten again in March, followed by two more hikes this year.

The kiwi’s move “is still being dictated by the US dollar comeback after Thursday’s FOMC [Federal Open Market Committee],” said Alex Hill, head of dealing at HiFX. “Clearly the Fed, in general, is happy with the inflation expectations and it just locks in the fact we are going to see some rate rises from it this year.”

Retail sales volumes rose 1.7 per cent in the final three months of 2017, on an adjusted basis, from a revised 0.3 per cent gain in the third quarter, Statistics New Zealand said.

Markets are still pricing in the first New Zealand rate hike in May 2019.

Hill said the kiwi failed to get a lift from better-than-expected fourth quarter domestic retail sales data “as nothing has changed in terms of New Zealand rate expectations”.

The kiwi has strong resistance at US74.50c and a weekly close below US73.30c would suggest more short-term downside, he said.

Looking ahead, Hill said investors will be watching for Fed chair Jerome Powell’s testimony next Wednesday in the US.

The kiwi fell to 59.33 euro cents from €59.52c on Thursday. The local currency dipped to 52.33 British pence from 52.54p on Thursday. The NZ dollar slipped to A93.23c from A93.72c and to 4.6268 Chinese yuan from

4.6388 yuan. It traded at 78.04 yen from ¥78.44 on Thursday.

NZ’s 10-year swaps fell 2 basis points to 3.24 per cent.