Dollar gains before Chinese data; RBNZ, US Fed differ on rates direction

The New Zealand dollar gained ahead of Chinese data that will give provide an update on the strength of the world's second-biggest economy, while investors weigh the implications of an interest rate cut in December, when the US may be raising rates.

The kiwi rose to 65.80 US cents at 5pm in Wellington from 65.32 cents at 8am and 65.31 cents yesterday. The trade-weighted index advanced to 71.78 from 71.35 yesterday.

Stocks across Asia were mixed ahead of the release of Chinese retail sales, industrial production and fixed-asset investment as investors weigh up the strength of China's economy, which is also New Zealand's second biggest export destination. Traders are also assessing the interest rate outlook for the US, where the Federal Reserve looks increasingly likely to raise rates next month, while New Zealand's Reserve Bank retains a bias to lower rates.

That's seen a steepening of New Zealand's interest rate curve, where longer dated rates follow international rates higher and short-term rates are held down by the prospect of a rate cut. The spread between New Zealand's two-year and 10-year swaps has widened to 85 basis points from 76 basis points last Friday before strong US jobs data firmed up expectations for a Fed rate hike next month.

"Two-year swaps have pulled back because everyone thinks Wheeler's going to cut over the next four months, so the two-years are not going to run away too far," said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland. "The long end can keep running, which means you end up with a bigger differential between short and long-term rates."

New Zealand's two-year swap rate slipped one basis points to 2.76 percent at 5pm in Wellington and the 10-year swap decreased four basis points to 3.61 percent.

The Reserve Bank today released its six-monthly financial stability report, noting while the system remained sound, rising house prices in Auckland and increasing indebtedness among dairy farmers posed growing risks to the nation's financial health. Wheeler told a parliamentary select committee the bank didn't see a rate hike to help quell Auckland's property market as a feasible option in the near-term, saying "the last thing we would want to do is drive the exchange rate up."

Government data showed guest nights rose to a record in September as the nation continued to benefit from strong tourist numbers.

The local currency rose to 92.99 Australian cents from 92.56 cents yesterday, and advanced to 4.1868 Chinese yuan from 4.1537 yuan. It gained to 80.85 yen from 80.39 yen yesterday, and increased to 61.09 euro cents from 60.75 cents. The kiwi was little changed at 43.34 British pence from 43.21 pence yesterday.

(BusinessDesk)