NZ dollar weakens after Fed ‘tapering’ announcement and strong local data

The New Zealand dollar weakened following a volatile day after the Federal Reserve said it would start tapering its asset purchase programme while local data continued to point to a strengthening economy which will push up interest rates next year.

The kiwi slipped to 81.73 US cents at 8am in Wellington, from 81.81 cents at 5pm yesterday and has traded in a 1 cent range over the past 24 hours. The trade-weighted index dropped to 77.38 from 77.50 yesterday.

The Fed said it will begin a modest US$10 billion wind down of its US$85 billion a month bond-buying programme next month although it signalled it would likely keep the key interest rate near zero for longer. As the market weighed the implications of immediate 'tapering' but a later start to 'tightening', New Zealand's better than expected third quarter gross domestic product figures were released.

"Yesterday's events confirmed key two messages," Kymberly Martin, strategist at Bank of New Zealand, said in a note. "First, the process of US Fed 'tapering' is not necessarily the death knell for the New Zealand dollar. Second, strong domestic data delivery is no longer sufficient to push the New Zealand dollar to greater heights."

BNZ's Martin said the New Zealand dollar is unlikely to return to its peaks against the greenback but will continue to be supported in the near term and is likely to trade above 80 US cents for much of the first half of 2014.

In New Zealand today, data is due on net migration and credit card billings.

Currency markets today may be driven by investors pulling back higher risk bets on currency positions ahead of the holiday season, David Croy, head of markets research at ANZ Bank New Zealand, said in a note. Croy expects the New Zealand dollar to remain strong over the period.

The New Zealand dollar slipped to 92.27 Australian cents at 8am in Wellington from 92.57 cents at 5pm yesterday and weakened to 59.83 euro cents from 59.88 cents after data showed the euro zone current account surplus hit a record high in October.

The local currency decreased to 49.88 British pence from 49.95 pence yesterday ahead of reports today on UK consumer confidence, the current account and the final reading of third quarter GDP.

The kiwi advanced to 85.14 yen from 85.02 yen ahead of the Bank of Japan meeting today where no policy changes are expected.

(BusinessDesk)