NZ dollar holds gains after Yellen voices uncertainty over US inflation

The New Zealand dollar held onto its overnight gains after Federal Reserve chair Janet Yellen voiced uncertainty over whether US inflation will soon rebound, casting some doubt on market expectations for US rate increases.

The New Zealand dollar was trading at 68.26 US cents as at 5pm in Wellington versus 68.31 cents at the start of the day and from 68.01 cents late yesterday. The trade-weighted index gained to 72.32 from 72.19 yesterday.

The kiwi rose overnight, benefiting from risk appetite after the Chicago Board Options Exchange Volatility Index (VIX), known as Wall Street's fear gauge, tumbled more than 7 percent to a reading of 9.88. Yellen, who spoke at the Stern Business School late in the day in New York, said inflation should rebound over the next year or two but added: "I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely." While a rate hike is fully priced in for the Dec. 13 Fed meeting investors are less certain about the outlook for 2018.

"We got a little bit of US dollar weakness when Yellen was speaking as there were a few things on the inflation front that she wasn't quite convinced over and that pushed the kiwi higher," said Ross Weston, a senior trader at Kiwibank.

Strong third-quarter construction data across the Tasman also helped support both the kiwi and the Australian dollar. Weston noted, however, both currencies pared some of those gains as markets realized the headline figure for construction work was boosted by the inclusion of a number of imported LNG platforms that "has no bearing on GDP."

Looking ahead, he said traders will be watching tomorrow's third-quarter retail sales data in New Zealand with the market expecting a 0.1 percent increase in total retail sales volumes, according to a Bloomberg survey of 10 economists.

The number is expected to be soft compared with the second quarter, which benefitted from tourism spending around sporting events, amid signs the housing market is slowing, said ANZ senior economist Phil Borkin. "While the labour market is clearly still performing well, which should continue to support spending growth overall, the weaker housing market is likely to have had some impact," he said.

The kiwi was trading at 90.21 Australian cents from 90.23 cents late yesterday. The kiwi rose to 58.16 euro cents from 57.95 cents and gained to 51.50 British pence from 51.35 pence. The local currency rose to 4.5250 yuan from 4.5135 yuan and gained to 76.65 yen from 76.55 yen.

New Zealand's two-year swap rate fell 1 basis point to 2.14 percent while the 10-year swap rate eased 1 basis point to 3.10 percent.