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US bond selloff clips kiwi's wings

NZ Newswire logoNZ Newswire 11/11/2016 Jonathan Underhill
© John Nicholson/Bloomberg News

The New Zealand dollar fell as a selloff in US bonds, on what's expected to be more stimulatory US government policy under Donald Trump, eroded the yield premium on kiwi assets and demand for the carry trade.

The kiwi fell to 71.99 US cents from 72.66 cents late Thursday. The trade-weighted index dropped to 77.96 from 78.21.

In the carry trade, investors borrow in a currency that offers low interest rates to buy a currency that has higher interest rates.

The yield on 5-year US Treasuries has jumped 31 basis points in the past week to reach 1.55 per cent, while the yield on 5-year New Zealand government bonds has risen 17 basis points to 2.49 per cent

Stocks on Wall Street rose overnight, with the Dow Jones Industrial Average touching a record high amid bets that US President-elect Donald Trump will spend more and regulate less after campaign promises including $US550 billion of new infrastructure, to lift economic growth and create jobs.

The US dollar index touched its highest level in more than two weeks. The market currently has 85 per cent odds that the Federal Reserve will raise interest rates next month.

"The kiwi has been caught in two quite interesting cross-currents," said Sheldon Slabbert, sales trader at CMC Markets.

"The kiwi is a sentiment-driven currency and markets right now are taking a 'glass half full' approach. What's overpowering that is bond rates have gone up and the spread versus New Zealand is getting squeezed. Obviously, that diminishes the appeal of the carry trade. People are anticipating more capital will be attracted to the US."

The Reserve Bank's cut to the official cash rate on Thursday, to a record low 1.75 per cent, is seen as the bottom of the easing cycle although the bank's projection for the OCR implies a 20 per cent chance of another cut.

The local currency rose to 76.70 yen from 76.40 yen and rose to 94.80 Australian cents from 94.69 cents. It fell to 4.9074 yuan from 4.9306 yuan, declined to 57.35 British pence from 58.45 pence and slipped to 66.03 euro cents from 66.32 cents.

New Zealand's two-year swaps were up 3 basis points to 2.23 per cent while the 10-year swap rate rose 9 basis points to 3.18 per cent.

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