Kiwi bounces from 7 1/2-month low v sterling as UK gears up for snap election

The New Zealand dollar bounced from a seven-and-a-half month low against the British pound after UK Prime Minister Theresa May called a snap election in an effort to seize a stronger mandate to negotiate her nation's exit from the European Union.

The kiwi traded at 54.90 pence at 5pm in Wellington, recovering from as low as 54.53 pence though still down from 55.75 pence yesterday. The Sterling's strength added to the downbeat sentiment around the greenback and the kiwi currency gained to 70.44 US cents from 70.06 cents yesterday.

The British pound jumped more than 3 US cents after May unexpectedly called a snap election for June 8, accusing opposition parties of threatening her administration's preparations for Brexit. May invoked Article 50 of the Lisbon Treaty to formally set in motion the UK's withdrawal from the regional bloc last month, kicking off a two-year exit process, after last year's referendum in favour of the move.

"It's a pretty smart move on her part to shore up a bit of support," said Mark Johnson, a senior dealer foreign exchange at OMF in Wellington. The pound recently traded at US$1.2825, and Johnson said "there's probably not much in the way of resistance now until US$1.30."

The pound's ascension weighed on the greenback which was already on the back foot as investors remain cautious about US President Donald Trump's policy programme. Treasury Secretary Steven Mnuchin said the tax reform package would probably come later than the August target after the administration's inability to overhaul US healthcare, and the yield on US 10-year Treasuries slipped to 2.18 percent as investors lost their appetite for riskier assets.

OMF's Johnson said the kiwi will continue to get pushed around by geopolitical events that are currently supporting safe-haven assets such as the yen and gold. The kiwi traded at 76.49 yen from 76.39 yen yesterday.

Local data today showed activity in New Zealand's service sector remained robust, while dairy prices increased at the latest GlobalDairyTrade auction. Tomorrow's inflation data will be closely watched to see whether rising food and fuel prices pushed the consumers price index near the mid-point of the Reserve Bank's 1 percent-to-3 percent target band.

New Zealand's two-year swap rate was unchanged at 2.28 percent and 10-year swaps fell 3 basis points to 3.22 percent.

The kiwi increased to 93.59 Australian cents from 92.70 cents yesterday and gained to 4.8470 Chinese yuan from 4.8261 yuan. It edged down to 65.69 euro cents from 65.82 cents yesterday. The trade-weighted index increased to 76.49 from 76.20 yesterday.

(BusinessDesk)