NZ dollar heads for 1.9% gain in 2017 after December boost

The kiwi "was the best performing major currency in December, amid a more positive dynamic for commodity currencies" – BNZ's Jason Wong. 

The New Zealand dollar is heading for a 1.9% gain against the greenback in 2017 after getting a 1% boost in a holiday-shortened week as the US dollar remains on the backfoot.

The kiwi traded at 70.97 US cents as at 3pm in Wellington versus 70.82 cents at 8am and 70.75 cents yesterday. That's near a two-and-a-half month high and is up from 69.63 cents at the end of 2016. While the kiwi ended higher against the US, the trade-weighted index was at 74.14 versus 74.07 yesterday and is down around 4.4 percent for the year.

The New Zealand dollar benefited from US weakness over the course of the year as markets fretted about US President Donald Trump and his policies but was hard hit by domestic uncertainty around the September general election, in particular when NZ First leader Winston Peters said he would support a Labour-led government and Jacinda Ardern became the next prime minister.

Traders had been tipping a stronger greenback in 2017 on the expectation of higher US interest rates.

Stuart Ive, senior dealer foreign exchange at OMF in Wellington, says the move into year-end is entirely related to positioning in US dollars and concerns about the impact of US tax reform.

Best-performer in December
"We have seen US dollar weakness due to the lacklustre reception of the US tax reform... We have gone from euphoric anticipation of tax reforms to the harsh reality that the tax reforms may not deliver what everyone was hoping," he says.

Bank of New Zealand FX strategist Jason Wong says the kiwi "was the best performing major currency in December, amid a more positive dynamic for commodity currencies."

Brent crude rose to as much as $US67 a barrel, its highest level since mid-2015; the LME index, a broad measure of metal prices, was up around 7% for the month; and NZX whole milk dairy powder futures were up around 2.5%, with drought conditions developing in New Zealand likely contributing to higher pricing.

Mr Wong says the December rally has pushed the kiwi back close to short-term fair value against the US dollar, increasing the chance of a modest pull-back in January. He expects it to largely track sideways in next month.

The kiwi is also trading close to short-term fair value against the Australian dollar, he says, with the kiwi trading at 91.03 Australian cents from 90.89 cents yesterday and down around 5.4% on the year.

Mr Wong says the strong run in metal prices represents a short-term headwind as it supports the Aussie but he "generally expects further range trading, with upside skew later in 2018."

The local currency traded at 59.42 euro cents from 59.39 cents yesterday and is down around 10% this year. It traded at 52.76 British pence from 52.72 pence yesterday after shedding 6.8% over the year. It was at 80.00 yen from 80.05 yen, down 1.2% since the end of 2016 and at 4.6283 Chinese yuan from 4.6289 yuan, down 4.2% on the year.

New Zealand's two-year swap rate was down one basis point to 2.20% on the day and fell 30 basis points on the year. The 10-year swap rate eased one basis point to 3.13 and was down 45 basis points on the year.