NZ dollar climbs above 70 US cents on relatively upbeat kiwi fundamentals

The New Zealand dollar rose above 70 US cents for the first time in about a month on expectations this week's budget will paint an upbeat picture of the domestic economy at a time political uncertainties have weighed on the greenback.

The kiwi rose to 70.19 US cents as at 5pm in Wellington from 69.36 cents late yesterday. The trade-weighted index increased to 75.80 from 75.07.

An explosion at a concert in Manchester, England, that left 19 dead and almost 60 injured had little impact on currency markets even though police are treating the incident as a terrorist incident. Instead, traders have been looking ahead to the release of the minutes of the last Federal Reserve policy meeting and the New Zealand budget on Thursday. The kiwi last traded above 70 US cents on April 25 and has broken through key resistance levels today.

"It's hard to paint a negative kiwi story right now," said Philip Borkin, senior economist at ANZ Bank New Zealand. "Domestic factors in New Zealand still look good."

By contrast, the US dollar is still vulnerable to political uncertainty in the US, including the Federal Bureau of Investigation's probe into links between people who had worked on Donald Trump's election campaign and the Russian government. The Washington Post reported yesterday that President Trump asked the director of national intelligence, Daniel Coats, and the director of the National Security Agency, Michael S Rogers, to publicly deny any evidence of collusion during the 2016 election, the report said. The US dollar index has fallen to its lowest level since November last year.

ANZ Bank economists said in a preview of New Zealand's Budget 2017 that it would "print some rosy fiscal numbers with rising surpluses and declining debt" and that "solid growth is a key driver." It expects the Treasury will project annual economic growth to average 3 percent over its forecast horizon, with stronger inflation.

Ahead of the release of the Fed minutes, some Fed officials have been talking up the prospects of interest rate hikes this year. Dallas Fed President Robert Kaplan said in an article published on his bank's website that he still saw scope for two more rate hikes this year and downplayed signs of weaker inflation.

By contrast, the Reserve Bank of New Zealand projected a weaker track for inflation through 2017 and only one 25 basis point hike in the official cash rate by 2020. The trade-weighted index is currently just below the 76 level the RBNZ projected it to average in the second quarter.

"The Reserve Bank has reminded us they are nervous about the currency. That will ultimately cap its upside," Borkin said.

The kiwi rose to 62.37 euro cents from 61.97 cents late yesterday as the euro gained against the greenback following comments from German Chancellor Angela Merkel that Germany's trade surplus reflected a euro that was too weak. It rose to 54.02 British pence, climbing over the course of the day, from 53.36 pence late yesterday.

The local currency gained to 78.01 yen from 77.33 yen and gained to 4.8346 yuan from 4.7774 yuan. It rose to 93.60 Australian cents from 93.21 cents.

New Zealand's two-year swap rate fell 2 basis points to 2.22 percent, and 10-year swaps fell 2 basis points to 3.23 percent.

(BusinessDesk)