Kiwi surge to one-year high leads charge as dollar slump deepens

by NZ Adviser10 Jun 2016
(Bloomberg) -- New Zealand’s  dollar surged to the highest level in a year as the prospect of continued central bank inaction at home and in the U.S. burnished the smaller nation’s interest-rate premium.

The kiwi gained the most among major currencies after the Reserve Bank of New Zealand  said it expects inflation to accelerate when it left the key rate unchanged Thursday. The U.S. dollar weakened for a third day as investors continued to push back bets for when the Federal Reserve will increase interest rates after ruling out action on June 15. The yen advanced toward a one-month high, with the Bank of Japan due to decide policy a day after the Fed.

“A slightly more upbeat RBNZ, combined with underlying U.S. dollar weakness is pushing kiwi towards 72 U.S. cents this week,” said Imre Speizer, a market strategist at Westpac Banking Corp. in Auckland. With a Fed move in June ruled out and odd for July low, “the U.S. dollar is likely to remain depressed by such thinking during the weeks ahead,” he said.

New Zealand’s dollar jumped 1.8 percent to 71.35 U.S. cents as of 6:55 a.m. in London after reaching 71.48, the strongest level since June 2015. The currency has appreciated almost 7 percent from a two-month low on May 30.

The greenback slid 0.3 percent to 106.71 yen. It weakened as far as 106.38 on Monday for the first time since May 4. The U.S. currency was little changed at $1.1397 per euro.

The yield premium offered by 10-year New Zealand sovereign debt over equivalent maturity U.S. Treasuries jumped to a four-week high of 94 basis points, from a decade-low 71 1/2 basis points on May 27.

New Zealand policy makers kept the official cash rate at 2.25 percent for a second straight meeting. Governor Graeme Wheeler said he expected inflation to reach the midpoint of his 1-3 percent target band earlier than previously projected, giving him scope to delay further monetary easing so he can gauge the impact of a spreading housing boom.

The kiwi was the worst-performing developed-market currency this year as recently as May 30, before relinquishing that mantle to the Brexit-plagued pound.

Dollar Doldrums
This month, it’s the dollar that has been the pariah. A report on Friday showed the smallest U.S. monthly payroll gain for almost six years, and Fed Chair Janet Yellen on Monday refrained from signaling the timing for higher rates after saying on May 27 an increase would likely be appropriate in “coming months.”

Fed funds futures indicate 58 percent odds that the Fed will raise rates by year-end, down from 74 percent probability at the start of last week, according to data compiled by Bloomberg.

The manager of Japan’s second-largest bond fund is staying bullish on the dollar, saying the onus remains on the Fed to act.

“The Fed needs to adjust first, because the Fed will be the only one that can act in these conditions,” said Tatsuya Higuchi, the chief fund manager in the fixed income investment division at Mitsubishi UFJ Kokusai Asset Management in Tokyo. “Otherwise, other countries need to cut their cash rate to adjust.”

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