NZ dollar below 72 US cents as US bond spike erodes carry trade appeal
By Jonathan Underhill
Nov. 11 (BusinessDesk) - The New Zealand dollar fell as a selloff in US bonds, on what's 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 71.99 US cents from 72.66 cents late yesterday. 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 5-year US Treasuries has jumped 31 basis points in the past week to reach 1.55 percent, while the yield on 5-year New Zealand government bonds has risen 17 basis points to 2.49 percent
Stocks on Wall Street rose overnight, with the Dow Jones Industrial Average touching a record high amid bets that US President-elect Donald Trump will spend more and regulate less after campaign promises including US$550 billion 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 currently has 85 percent 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 is 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 yesterday, to a record low 1.75 percent, is seen as the bottom of the easing cycle although the bank's projection for the OCR implies a 20 percent chance of another cut.
"The Reserve Bank has put us in a slightly divergent monetary policy versus other central banks," Slabbert said. "The US is 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 yen from 76.40 yen yesterday and rose to 94.80 Australian cents from 94.69 cents. It fell to 4.9074 yuan from 4.9306 yuan, declined to 57.35 British pence from 58.45 pence and slipped to 66.03 euro cents from 66.32 cents.
New Zealand's two-year swaps were up 3 basis points to 2.23 percent while the 10-year swap rate rose 9 basis points to 3.18 percent.