NZ dollar holds near post-float high vs. A$ as commodity prices diverge
The New Zealand dollar held near a post-float high against its Australian counterpart as diverging prices for the neighbouring nations' major export commodities painted a rosier picture for the local outlook, and stoked demand for the kiwi.
The local currency traded at 95.98 Australian cents at 5pm in Wellington, near the 96.22 cents peak it reached in Northern Hemisphere trading, from 94.97 cents yesterday. The kiwi declined to 77.57 US cents at 5pm from 77.92 cents at 8am, paring a gain from 77.28 cents yesterday.
The average price at Fonterra Cooperative Group's first GlobalDairyTrade auction for the year rose 3.6 percent, led by gains in butter and butter milk powder prices, and in contrast to falling oil prices. Dairy products are New Zealand's biggest export and are considered a 'soft' commodity, while Australia's resources-based exports are linked to 'hard' commodity prices such as oil and iron.
"The way the kiwi has outperformed , especially against the Australian dollar, is more a story of commodity price divergence," said Raiko Shareef, currency strategist at Bank of New Zealand in Wellington. "We had the dairy auction quite positive for kiwi, whereas we had oil and other hard commodities falling away."
Investors have also been attracted to New Zealand by the nation's higher interest rates and the central bank's bias towards hiking rates further, whereas traders are speculating Australia's Reserve Bank may cut rates. The yield on New Zealand's 10-year government bond was 3.55 percent at 5pm in Wellington, compared to Australia's 2.69 percent.
Sydney-based Westpac Banking Corp chief currency strategist Robert Rennie and currency strategist Sean Callow said in a note the recent bounce in iron ore prices and stabilisation in yield advantages should be in the Australian currency's favour, and weakness around these levels are an opportunity to buy the Aussie dollar against the kiwi.
Investors are waiting for US employment figures on Friday in New York to gauge the strength of the world's biggest economy before trading returns to more normal levels next week as people return from their Christmas and New Year holidays.
BNZ's Shareef said the US dollar remained a favourite among investors, who expect it to rise as the Federal Reserve moves away from its extraordinarily low zero interest rate policy. Still, falling oil prices would reduce inflation and may slow the pace of tightening, pushing down yields on US 10-year Treasuries, which were at 1.95 percent at 5pm in Wellington.
That had flattened New Zealand's interest rate curve, with the 10-year swap rate at 3.95 at 5pm in Wellington from 4 yesterday, while the two-year swap rate was unchanged at 3.78.
Shareef said the short-end of New Zealand's interest rate curve would only fall if traders start pricing in an interest rate cut by the Reserve Bank, which isn't expected, and that was why the curve was flatter.
The kiwi dollar increased to 92.28 yen at 5pm in Wellington from 92.15 yen yesterday, and climbed to 65.30 euro cents from 64.68 cents. It advanced to 4.8160 Chinese yuan from 4.8009 yesterday, and rose to 51.20 British pence from 50.62 pence. The trade-weighted index gained to 79.32 from 78.83.