NZ dollar bounces back from 2-month low as Chinese growth fears ease

BUSINESSDESK: The New Zealand dollar bounced back from a two-month low in local trading as fears over the slowdown in China’s economy eased, stoking demand for commodity-linked currencies.

The kiwi rose to 81.22 US cents from 80.81 cents at 8am and yesterday. The trade-weighted index gained to 72.54 from 72.18.

The currency dropped to 80.66 cents yesterday after a weak HSBC flash purchasing manager’s index, a lead indicator of factory activity in China, which raised expectations the world’s second-biggest economy faces a harder landing as it eventually slows. That came after Chinese demand for iron ore started to taper out, and the government revised down its forecast growth expectations to 7.5 percent from 8 percent.

“The market is not correctly pricing a softening of China’s economy – everyone’s expecting China to ramp along,” said Dan Bell, currency strategist at HiFX in Auckland. “It was only a flash PMI reading, and it’s significant to see how sensitive the New Zealand dollar is to Chinese data.”

Bell said China has been tightening monetary policy for the last couple of years as it tries to pad the economic slowdown amid rising inflation and a looming property bubble.

The market will focus on China’s actual PMI when it’s released next week as traders link growth in Australia and New Zealand to their growing trade alliance with the world’s second biggest economy.

Bell said the kiwi dollar will probably consolidate after yesterday’s decline, but is still relatively strong and may squeeze up to 82 US cents

Until investors buy into the idea the US Federal Reserve will start hiking interest rates, Bell said he doesn’t expect the greenback to gain when traders’ appetite for higher yields increases. The market is pricing in 15 basis points of hikes to the Federal Funds rate over the coming 12 months, according to the Overnight Index Swap curve.

The New Zealand dollar rose to 78.01 Australian cents from 77.76 cents yesterday, and was little changed at 67.04 yen from 67.22 yen. It climbed to 61.51 euro cents from 61.07 cents yesterday, and advanced to 51.33 pence from 50.92 pence.