Kiwi gains as low volatility encourages investors to seek bigger returns

BUSINESSDESK: The New Zealand dollar gained in local trading, snapping three days of declines, as low volatility gave investors the confidence to seek bigger returns from the nation's relatively high yields.

The kiwi rose to 82.56 US cents at 5pm in Wellington from 82.32 cents at 8am and 81.96 cents yesterday. The trade-weighted index advanced to 73.40 from 72.95 yesterday.

The Chicago Board Options Exchange's Volatility Index, commonly known as Wall Street's fear gauge, rose 15% to a two-week high 16.81 as investors prepare for the Spanish government's budget amid speculation the Mediterranean nation will seek a formal bail-out for its ailing banking sector.

The relatively low level of volatility has stoked appetite for higher yields.

New Zealand's interest rates are higher than its trading partners, with the yield on the benchmark 10-year government bond at 3.47%, compared to Australia's 3.05%, 1.628% on 10-year US Treasuries and 0.56% for China's 10-year government bond.

"When you've got a low volatility environment the relative health shines through, and the New Zealand dollar looks alright," says Chris Tennent-Brown, FX economist at Commonwealth Bank of Australia in Sydney. "The solid GDP number last week galvanised everybody. Rates aren't going up in a hurry, but they don't need to do down."

New Zealand's 10-year swap rate, a fixed payment paid to get floating rates, fell 2 basis points to a two-month low 3.645%, flattening the so-called yield curve and indicating a smaller premium for long-term rates.

The New Zealand Debt Management Office today sold $150 million of bonds maturing in April 2023 at an average yield of 3.46%. The debt pays annual interest of 5.5%.

The rally in the kiwi came after the National Bank Business Outlook showed local firms were less confident about the broader economy this month, though more optimistic on their own prospects.

The New Zealand dollar rose to 79.36 Australian cents from 79.14 cents yesterday and climbed to 64.12 yen from 63.72 yen. It gained to 64.08 euro cents from 63.65 cents yesterday and rose to 51 British pence from 50.69 pence.