NZ dollar heads for 2% gain in 2016

Photo / File

The New Zealand dollar is heading for a 2 per cent gain against the greenback this year, belying the currency's volatility in a year that delivered unexpected results in the UK's vote on European Union membership and the US presidential election, as well as local interest rates sinking to a new record low.

The kiwi traded at 69.63 US cents at 1.30pm in Wellington from 68.25 cents at the start of the year. However, New Zealand's currency fell as low as 63.46 cents in January and peaked at 74.85 cents in September in a year that whipped the kiwi back and forth.

The greenback rallied through the final two months of the year after the surprise election of Donald Trump to the US presidency on a campaign of tax cuts and infrastructure spending gave the US Federal Reserve room to signal faster interest rate hikes next year after failing to deliver tighter policy this year.

The US dollar appreciation has slowed heading into the end of the financial year as investors look to lock in profits from that gain and as China reduced the weighting of the US dollar in its yuan index basket of currencies.

"We're definitely seeing some profit-taking, that's most of it, and the yuan thing exacerbated it in thin, illiquid markets," said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional in Auckland. "There's been a big squeeze over the new year on US dollars - the forward market's quite illiquid - but it will get better" once trading desks re-open in January, he said.

The higher track for US interest rates has revived interest in global bond markets and boosted rates around the world, sapping expectations New Zealand's Reserve Bank will have to cut the official cash rate again. New Zealand's two-year swap rate was unchanged at 2.5 per cent and is down from 2.83 per cent a year ago, while 10-year swaps at 3.58 per cent were down from 3.73 per cent at the end of 2015.

On a trade-weighted basis, the kiwi is heading for a 4.4 per cent gain in the year, trading at 77.57 at 1.30pm in Wellington from 74.28 at the end of 2016. Again, the TWI was more volatile, peaking at 79.30 in September, having troughed at 70.44 in January.

The kiwi is heading for a 22 per cent gain against the British pound after the UK's currency was re-rated by investors after the surprise vote against Britain retaining its EU membership in late June. The kiwi traded at 56.63 British pence from 46.30 pence at the end of last year.

The local currency is heading for a 4.9 per cent increase to 65.97 euro cents and a 2.6 percent rise to 96.15 Australian cents since the start of the year.

The kiwi is heading for an 8.7 per cent gain to 4.8417 Chinese yuan, and a 1.1 per cent decline to 81.04 yen.