NZ dollar at six month high as confidence grows in local economy

Strong dairy prices have underpinned the kiwi. Illustration / Rod Emmerson

The New Zealand dollar hit a six-month high as the local economic outlook stacks up well compared to the rest of the world.

The kiwi rose as high as 66.49 US cents, the most since Jan. 17, and traded at 66.45 cents at 5pm in Wellington from 65.61 cents on Tuesday. The trade-weighted index advanced to 72.58 from 72.12 on Tuesday.

Currencies have largely tracked investor sentiment in equity markets in recent months as traders waxed and waned on how much of an impact the covid-19 pandemic would have on global growth.

That theme is starting to shift as traders now start pricing economic fundamentals into currencies, weighing on the greenback where the US economy faces a rising number of new covid cases and uncertainty over the presidential election in November.

Meanwhile, NZ data is showing a rapid recovery from the lockdown in April - although unemployment is still to peak. The government is holding back a $14 billion war chest to stimulate the local economy through any subsequent covid waves and offset their impact on activity.

"Last night was one of the first times in a while where there was a more vigorous bounce in a whole bunch of currencies and a fairly modest bounce in equities," said Imre Speizer, head of NZ strategy at Westpac.

"The relative economic outlook is starting to get priced into exchange rates and the market has realised the US economic outlook is not going to be as good as the Australian or New Zealand ones."

Strong dairy prices have underpinned the kiwi, with the latest Global Dairy Trade auction outperforming expectations. Whole milk powder prices rose with buyers seeking to secure supply for fear of missing out if another covid wave disrupts supply chains.

NZ today upgraded its relationship with Vietnam, another nation that has managed to control the impact of the pandemic. The two nations today announced a strategic partnership to deepen cooperation in areas including agriculture, education, vocational training and finance.

The kiwi fell to 93.09 Australian cents from 93.47 cents yesterday, rose to 71.01 yen from 70.41 yen, and climbed to 4.6321 Chinese yuan from 4.5870 yuan. It traded at 57.58 euro cents from 57.40 cents yesterday and 52.23 British pence from 51.84 pence.

The bid-price on the two-year swap rate was 0.2025 per cent from 0.1950 per cent yesterday, while 10-year swaps were at 0.6800 per cent from 0.6725 per cent.