NZ dollar holds gains as new government awaited

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The New Zealand held on to earlier gains through the local trading session as minutes to the last US Federal Reserve policy review raised questions about the pace of future interest rate hikes, and as the formation of the next New Zealand government takes longer than initially signalled.

The kiwi traded at 71.04 US cents at 5pm from 70.91 cents at 8am, up from 70.75 cents yesterday. The trade-weighted index advanced to 74.74 from 74.59.

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Minutes to the Fed's September 19-20 meeting showed there were concerns about the pace of inflation in the world's biggest economy, which in turn raises questions about the central bank's pace for raising interest rates. Investors are watching US data closely, with the consumer price index scheduled for release on Friday in Washington. However, the impact of the recent hurricanes in the region makes it harder for economists to interpret the figures.

At home, NZ First won't make a decision on which party it will support to form the next government until Saturday at the earliest.

"The kiwi is a little bit stronger in our time zone, mainly on the back of the Fed minutes which were perceived as a little more dovish," said Phil Borkin, senior economist at ANZ Bank New Zealand in Auckland. "Until we get a bit of clarity on the election with political direction, whether it's National- or Labour-led or something in between or something totally different, then markets are going to be sitting there waiting, and I certainly believe there will be reasonable reactions either way on the day."

Local data today showed food prices rose 0.5 per cent in September due in part to higher butter prices, while separate surveys showed house sale volumes dropped by a more than a quarter nationwide and consumer confidence dipped from a three-year while remaining at elevated levels.

New Zealand's two-year swap rate was unchanged at 2.19 per cent, and 10-year swaps slipped 1 basis points to 3.24 per cent.

Borkin said the short end of the interest rate yield curve will stay range-bound for the next 12 months with the Reserve Bank projecting no movement on rates in the near-term and wobbly economic data unlikely to shake that view.

The kiwi traded at 90.86 Australian cents from 90.90 cents yesterday and increased to 4.6794 Chinese yuan from 4.6677 yuan. It decreased to 59.82 euro cents from 59.91 cents yesterday and traded at 53.59 British pence from 53.60 pence. It gained to 79.81 yen from 79.56 yen yesterday.