NZ dollar holds gains after brief decline following bigger July trade deficit

The New Zealand dollar held gains in local trading after a brief slide when government figures unexpected showed a bigger deficit in July.

The kiwi increased to 78.23 US cents at 5pm in Wellington from 78.11 cents at 8am and 77.99 cents on Friday in New York, having slid below 78 cents following the trade report. The trade-weighted index edged down to 73.83 from 73.99 last week.

The local currency has declined 5.5 percent this year on the expectation the Federal Reserve will start tapering its US$85 billion in monthly bond buying and end the programme mid-next year. Commodity currencies such as the New Zealand dollar, which have benefited from the global financial crisis, are coming under pressure as the expected start of tapering looms in September.

"The kiwi is due to probe a little bit lower in the course of the week but not massively aggressively lower," said Michael Johnston, senior trader at HiFX. "The US dollar should show a little more signs of life."

A UK bank holiday means quiet trading in Europe for the day, Johnston said.

Meanwhile, a report today showed New Zealand recorded its biggest trade deficit in 10 months in July, driven by a jump in imports of crude oil and helicopters while exports fell. The merchandise trade gap was $774 million last month, for an annual deficit of $1.69 billion, according to Statistics New Zealand. Economists had expected a trade surplus of $50 million in July for an annual deficit of $830 million.

The New Zealand dollar held its ground as some investors bet the Fed may delay tapering on concern about the strength of the US economic revival after a report showed new home sales in the US dropped more than expected in July and the data for the previous three months was revised down.

"There's been mixed data out recently and mixed signals on when they are going to do it," said HiFX's Johnston. "The market had thought they were probably going to do it in September but after the new home sales on Friday night were disappointing, it might get pushed back a bit."

Still, tapering was inevitable and although the kiwi may edge up should the Fed choose not to start in September, it will eventually decline as tapering begins, Johnston said.

The New Zealand dollar rose to 86.51 Australian cents at 5pm in Wellington from 86.77 cents last week and slipped to 77.17 yen from 77.54 yen. The kiwi declined to 58.47 euro cents from 58.66 cents and was little changed at 50.25 British pence from 50.23 pence.

(BusinessDesk)