Kiwi ends 2017 much where it started after volatile ride vs greenback

The New Zealand dollar will end 2017 very close to where it began against the greenback after a volatile ride on events in the US and the general election at home but did lose much of its shine against all other trading partners.

The kiwi traded at 70.17 US cents as at 12pm in Wellington from 69.63 US cents at the end of 2016. During the year it traded in a 7.79 US cent range compared to a trading range in 2016 of about 12 cents.

The kiwi gradually pushed higher against the greenback as markets were increasingly disappointed by US President Donald Trump ability to deliver on his promises - like tax reform - and as geopolitical tensions ratcheted up, in particular between the US and North Korea. It peaked at a two-year high in July of 75.58 cents when the US Federal Reserve softened its language on inflation, casting doubt on the US central bank's rate hike track going forward.

It then began to wane on domestic political uncertainty when it became apparent that the National Party wasn't a shoe-in to win a fourth term in the September general election and tumbled 2.5 percent in the week when NZ First leader Winston Peters said he would support a Labour-led government and Jacinda Ardern became the next prime minister.

It touched a low of 67.79 cents in November as investors continued to fret about the new government and the impact of its policies, with a plunge in business confidence and as New Zealand's Reserve Bank continued to signal rates would remain on hold.

"The range has been dictated by two factors really. Everything in America and the election here. They were certainly the major events over the past year," said OMF private client manager Stuart Ive.

Tim Kelleher, head of institutional foreign exchange sales at ASB Bank, agreed. "You would call the kiwi a game of two halves this year," he said.

The RBNZ's insistence that rates won't be lifting until June 2019 at the earliest has kept swap rates on ice. New Zealand's two-year swap rate was at 2.12 percent and is down from 2.50 percent a year ago, while 10-year swaps at 3.15 percent were down from 3.58 percent at the end of 2016.

That, coupled with uncertainty around the new government and its policies, kept it under pressure against all other trading partners.

On a trade-weighted basis, the kiwi is heading for a 4.7 percent fall in the year, trading at around 73.80 as at 12pm. It is down 7.4 percent against the British pound to 52.42 and heading for a 10 percent fall against the euro to 59.12 euro cents. It has also fallen 5.3 percent against the Aussie to 91.07.

The kiwi is heading for a 4.6 percent fall to 4.6195 Chinese yuan, and a 1.9 percent decline to 79.54 Japanese yen.

The kiwi dollar did manage to claw back some its losses into the end of the year, in particular when New Zealand Superannuation Fund chief executive Adrian Orr was named the next Reserve Bank governor, starting in late March 2018. Orr was a former deputy governor at the Reserve Bank before heading to the NZ Super Fund, which he's steered since its inception in 2007.

"The market certainly gave that a thumbs up," said Ive.

Looking ahead, both Ive and Kelleher said markets would be keeping a very close eye on a review of the Reserve Bank Act as well as Orr's first public comment as governor.

The US dollar, however, is expected to remain the main driver for the kiwi.

"All things to do with America remain very much in focus. Trump has been the single biggest disrupter in global markets for the entire year," said Ive, adding the geopolitical tensions will continue to dominate.

Kelleher said the US interest rate track will also be key. "If the RBNZ is still on hold and the Fed keeps hiking, what is going to happen when there is no interest rate differential," he said. "Will the RBNZ need to hike to keep pace? Will we get rate hikes sooner than we think?".

The spectre of a drought could also push the kiwi around as it would likely lead to a lift in global dairy prices as supply out of New Zealand could be curbed. Agriculture Minister Damien O'Connor said the government is closely watching dry conditions and in the worst-case scenario, criteria for a medium-scale event could be met as early as January.

(BusinessDesk)