NZ dollar advances in volatile trading as investors weigh US tapering, stronger local economy

The New Zealand dollar advanced in volatile trading as investors weighed the likelihood of the US reducing monetary stimulus next month, which is positive for the US dollar, against upbeat local data, which is underpinning the New Zealand dollar.

The kiwi rose to 80.73 US cents at 8am in Wellington from 80.54 cents at the 5pm market close yesterday. Overnight, the local currency traded between 79.94 US cents and 81.03 cents. The trade-weighted index was little changed at 75.80.

The US dollar surged after the latest US jobless data fuelled expectations the Federal Reserve will announce plans to begin cutting back its bond-buying program at its meeting next month. Meanwhile, recent positive reports on New Zealand manufacturing activity, consumer confidence and retail sales are supporting the local currency.

"US data was generally stronger, which saw the New Zealand dollar test 80 US cents early," Carrick Lucas, a strategist at ANZ New Zealand, said in a note. "However, strong US dollar selling resulted in a sharp Euro move higher, dragging the New Zealand dollar back up to the 81 US cent mark. This quick reversal indicates the New Zealand dollar remains in demand and will likely end the week strong."

The New Zealand dollar will likely trade between 80 US cents and 81.50 cents today, Lucas said.

In the US yesterday, a report showed initial claims for unemployment benefits dropped 15,000 last week to a seasonally adjusted 320,000, the lowest level since October 2007, according to the Labor Department. That was below the 335,000 economists had predicted.

The New Zealand dollar rose to 88.32 Australian cents at 8am in Wellington from 87.77 cents yesterday after a report on manufacturing activity highlighted the divergence between the two economies.

The BNZ-BusinessNZ performance of manufacturing index rose 4.3 points to 59.5 in July from June, the highest result for a July month since the survey began in 2002 and the third highest monthly result on record. A reading above 50 indicates the sector expanded, while a fall below 50 shows contraction. Australia's equivalent measure of manufacturing activity showed a contraction of 42 in July.

A speech by Australian Reserve Bank assistant governor Guy Debelle at 1:30pm local time today isn't expected to be market moving, Bank of New Zealand markets strategist Kymberly Martin said in a note.

The kiwi slipped to 78.48 yen from 78.70 yen yesterday and weakened to 60.44 euro cents from 60.60 cents. The local currency dipped to 51.59 British pence from 51.69 yesterday.

(BusinessDesk)