US Government bond yields have risen sharply pre-election uncertainty. Photo / File
US Government bond yields have risen sharply pre-election uncertainty. Photo / File
The New Zealand dollar has dropped by more than US4c, or 6%, over the past month, driven by a strong US dollar and an expectedly resilient US economy.
The Kiwi traded on Friday at US59.67c, down from US$63.70c a week ago, having hit a 10-week low of US59.40c overnight.
Despitepolls showing a close race between former President Donald Trump and current Vice-President Kamala Harris, markets look to be pricing in a Trump win on Wednesday (NZ time).
Markets anticipate fiscal expansion and more bonds coming on stream under a Trump administration, which has served to drive yields up across the curve.
US 10-year Treasury yields have jumped by about 50 basis points to 4.25% over the past month, boosting the greenback over most other currencies.
In addition, the US economy is running far better than most had anticipated, and the market now expects the Federal Reserve to moderate its easing plans, or perhaps even put them on hold.
The talk now is for a soft landing for the US economy, and market players have changed their rate cut expectations considerably.
ASB senior economist Mark Smith said market volatility in the US had been at its highest so far this year.
“The major driver has been changes in interest rate expectations, so you have had a resilient US economy and there has been a paring back of Fed rate cut expectations over the last few months,” Smith said.
“New Zealand has stood out for more of the wrong reasons as being relatively weaker than other economies and the Reserve Bank has acknowledged that and has started cutting.”
Last month, the Reserve Bank took a bit knife to its Official Cash Rate (OCR) with a 50 basis point cut to 4.75%.
ASB senior economist Mark Smith say market volatility in the US has been at its highest so far this year.
Another 50-pointer is expected when the Reserve Bank releases its monetary policy statement on November 27.
Smith said other central banks around the world are looking at only gradual cuts at best.
Markets are pricing in a 25 basis point cut in the US Federal Reserve’s funds rate on Friday but rate cut expectations are not as keen as they once were a month or two ago, as the economy looks to be heading towards a soft landing.
“The US economy is resilient and there are some signs that core inflation in the US looks to be stickier than previously thought, so instead the Fed is going to be very gradual,” Smith said.
“There has essentially been a halving of rate cut expectations by the end of the year.
“There has been a notable pick-up in market volatility in treasuries in particular, but in currencies as well.
“There is a bit more risk aversion from that event [the US election] and that will be weighing on the New Zealand dollar as well.”
Smith said the “Trump trade” had gathered momentum over the past few weeks.
“US Treasury yields have bumped up by 50 to 60 basis points across the yield curve on the assumption that America’s fiscal position will worsen under Trump.”
In the meantime, New Zealand remained in a difficult space.
“We are not talking soft landings here because we are talking about a protracted downturn.
“If Trump goes through with the protectionist sentiment, it will mean a big headwind for the New Zealand economy, which depends on trade.
“That can hurt the New Zealand economy, so I would expect the NZ dollar to weaken further.
“A Trump victory would certainly be a negative for the New Zealand dollar.”
ANZ senior strategist David Croy said markets were worried about US fiscal expansion, regardless of the election outcome.
“Financial markets are worried about fiscal expansion after the election, to varying degrees, depending on who wins, and that’s contributing to the rise in bond yields, which turn has contributed to the rise of the US dollar.
“I don’t read it as being one election outturn being better than another,” Croy said.
The impact of US market moves on the NZ dollar over the past month has been unmistakable
“It’s been a pretty decent US4.4c move, so it’s been huge.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
