NZ dollar weighed by risk aversion ahead of RBNZ

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The New Zealand dollar fell as escalating tensions between the US and North Korea dampened risk appetite and ahead of what is expected to be a more dovish outlook from the Reserve Bank tomorrow.

The kiwi traded at 73.16 US cents as at 5pm in Wellington from 73.23 US cents as at 8am and down from 73.53 cents yesterday. The trade-weighted index declined to 77.19 from 77.43 yesterday.

Tensions on the Korean peninsula escalated after a spokesman for the Korean People's Army said in a statement that it was "carefully examining" plans for a missile attack on the US Pacific territory, which has a large US military base, Reuters reported. The comments came just hours after US President Donald Trump told North Korea that any threat to the United States would be met with "fire and fury".

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Sheldon Slabbert, a trader at CMC Markets, said the kiwi was likely to stick to a 72-to-74 US cents range in the short-term. "Risk off sentiment is pretty much prevailing at this point in time," said Slabbert. "That risk off environment is not favourable for kiwi."

Both the kiwi and the Australian dollar were also weighed on when China's consumer inflation unexpectedly slowed in July. Official data showed the CPI increased 1.4 per cent from a year earlier, compared with a 1.5 per cent gain in June.

"It's not an environment where people are looking for risk," said Slabbert.

That combined with growing expectations the central bank could signal low rates for even longer kept the kiwi under pressure. Tepid inflation and soft data have increased expectations that the central bank - which previously forecast rates could begin lifting in 2019 - will now signal 2020. Governor Graeme Wheeler will deliver his final monetary policy statement tomorrow and is widely expected to keep rates on hold at 1.75 per cent.

The kiwi was trading at 80.42 yen from 81.33 yen and at 4.8950 Chinese yuan from 4.9250 yuan. It was at 62.31 euro cents from 62.26 cents yesterday. It was at 56.34 British pence from 56.37 pence and at 92.91 Australian cents from 92.90 cents yesterday.

New Zealand's two-year swap rate fell 1 basis point to 2.15 per cent while 10-year swaps declined 2 basis point to 3.14 per cent.