NZ dollar gains may be short-lived as investor nerves tested

The New Zealand dollar is heading for a 0.8 per cent weekly gain. Photo / 123RF

The 0.8 per cent weekly gain the New Zealand dollar is heading for may be short-lived as geopolitical tensions and rising US interest rates heighten market volatility.

The kiwi traded at 65.61 US cents as at 5pm from 65.51 cents yesterday, up from 65.06 cents on Friday in New York. The trade-weighted index was at 71.87 from 71.67 yesterday and is heading for a 1 per cent weekly gain.

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The local currency got a boost from higher than expected inflation data this week, which prompted some traders to reassess the Reserve Bank's ability to cut interest rates.

However, that gain hasn't shifted the longer-term trend of rising US rates, which makes the greenback more attractive. The yield on US 10-year Treasuries is 50 basis points above its New Zealand equivalent.

On top of that, investors have become increasingly nervous about how the US will respond to accusations Saudi Arabia - its Middle Eastern ally - murdered a journalist.

Investors are also unsure as to whether the UK and the European Union will reach a deal on Brexit, and how the EU will cope with Italy's plans to run wider budget deficits. The VIX, known as Wall Street's fear gauge, was at 20.06, compared with its five-year moving average of 13.23.

Martin Rudings, a senior dealer foreign exchange at OMF, said investors are using that heightened uncertainty and rising US interest rates as a reason to get out of riskier assets. That is underpinning demand for the greenback.

"The kiwi has been trending lower and it's not out of that," he said. "It's stuck in the same situation as other commodity currencies."

New Zealand's two-year swap rate was unchanged at 2.02 per cent; the 10-year swaps fell 3 basis points to 2.89 per cent.

The local currency rose to 4.5492 Chinese yuan from 4.5428 yuan yesterday after Chinese economic growth fell short of expectations at an annual pace of 6.5 per cent in the third quarter. The kiwi increased to 92.27 Australian cents from 91.85 cents yesterday and advanced to 50.37 British pence from 50.02 pence. The local currency was almost unchanged at 73.73 yen from 73.71 yen yesterday and increased to 57.26 euro cents from 56.97 cents.