NZ dollar gains with commodity prices

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The New Zealand dollar gained with prices of commodities as traders awaited the results of the Federal Reserve's two-day policy meeting that will chart a course for global interest rates.

The kiwi dollar advanced to 71.94 US cents as at 5pm in Wellington, from 71.44 cents late yesterday. The trade-weighted index gained to 78.91 from 78.66.

Financial markets are positioned for the Fed to announce a 25 basis point increase in the fed funds rate to a range of 0.5 percent-to-0.75 percent. But they're also waiting for guidance on the track of interest rates through the next two years and the extent to which the Fed takes into account the fiscal stimulus a Donald Trump administration could inject into the world's biggest economy.

"Commodities had a good night overnight and that helped the commodity currencies. But the market is really treading water ahead of the Federal Reserve decision," said Michael Johnston, senior trader at HiFX. "This is very much a delayed hike from the Federal Reserve. This time last year the Fed was expected to have raised rates four times by now. Instead, they've left it to the last gasp to do one."

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Johnston said two further rate hikes from the Fed are priced into the interest rate swap market for 2017 and two-to-three hikes every year for the next three years. Even then the fed funds rate is only expected to reach about 1.75 percent "but at least its heading in the right direction," he said. If the Fed doesn't signal at least a couple of increases or more after this week's meeting, then there may be a selloff in the greenback and currencies such as the kiwi would gain.

Still, Johnston says he would sell the kiwi on any rallies as the currency is still well above its long-run average and could trade as low as 67 US cents or 68 cents.

The kiwi dollar traded at 67.62 euro cents from 67.63 cents late yesterday. It rose to 95.93 Australian cents from 95.58 cents, slipped to 56.73 British pence from 56.83 pence and rose to 4.9622 yuan from 4.9496 yuan. The kiwi gained to 82.78 yen from 82.40 yen.

The two-year swap rate fell 2 basis points to 2.26 percent and the 10-year swap rate fell 2 basis points to 3.40 percent.