NZ dollar heads for 5.8% gain in year on higher rates; fiscal cliff unresolved
By Paul McBeth
Dec. 31 (BusinessDesk) - The New Zealand dollar rose as traders squared up their year-end positions as negotiations in the US to stave off legislated tax hikes and spending cuts that automatically kick in on Jan. 1 remain unresolved. That kiwi is heading for a 5.8 percent annual gain on its relative yield advantage.
The kiwi rose to 82.33 US cents at 1.30pm in Wellington from 81.94 cents at 8.30am and 81.93 cents on Friday in New York. The trade-weighted index advanced to 73.82 from 73.55 last week, and is heading for a 6.8 percent annual gain.
US legislators were still locked in negotiations as both the Senate and House of Representatives were sitting in a last-ditch bid to avert the US$600 billion fiscal cliff, which would push the world's biggest economy back into recession.
"The kiwi's going to remain under pressure until they get a resolution" on the fiscal cliff, said Michael Johnston, director of foreign exchange at HiFX in Auckland.
New Zealand's currency has been a favourite among traders this year as investors have scoured the global for better returns in the relative safety of developed economies. Though local data has tended to disappoint, New Zealand's economy has continued to recovery in contrast to some of its peers.
At the same time global central banks have flooded the markets with money, meaning local interest rates have been more attractive. The yield on New Zealand's 10-year government bonds was 3.55 percent at 1.30pm in Wellington, compared to a 1.7 percent yield on US 10-year Treasuries, and 1.32 percent on 10-year German bunds.
"The US dollar will stay under pressure as they continue to print money - more supply of US dollars keeps it under pressure and will be the dominant factor certainly for the first half of next year," Johnston said.
Trading in the currency has become less volatile, climbing as high as 84.70 US cents in February and as low as 74.13 cents in June, and Johnston expects it to trade in 10 cents range next year between the high-70s and mid-to-high-80s.
Johnston expects the currency will spend more time above 80 Australian cents next year as Australia's economy slows down with its waning resources boom. The kiwi increased to 79.13 Australian cents from 79.01 cents last week, and is headed for a 4.8 percent annual gain.
The kiwi is headed for an 18 percent surge against the yen this year after a new Japanese government saw investors sell out of the yen on the expectation the administration will lean more heavily on the Bank of Japan to take a more active role in weakening the currency. The kiwi rose to 70.75 yen at 1.30pm in Wellington 70.53 yen on Friday in New York.
New Zealand's currency rose to 62.21 euro cents from 61.98 cents on Friday in New York and is headed for a 3.4 percent gain this year. It advanced to 50.93 British pence from 50.68 pence last week, and is poised to rise 1.6 percent this year.