The New Zealand dollar gained on expectations prices will rise in tonight's GlobalDairyTrade auction, adding to the positive story of the domestic economy.

The kiwi dollar rose to 71.33 US cents as at 5pm in Wellington from 70.98 cents late yesterday. The trade-weighted index edged up to 78.20 from 78.10.

Whole milk powder may rise 3.4 percent, the fourth straight gain for New Zealand's key commodity export at tonight's dairy auction, based on pricing of NZX dairy futures. The Reserve Bank has forecast the domestic economy picked up pace this quarter and New Zealand interest rates are still at a premium to US rates. However, traders say there's still a risk that the Reserve Bank could cut the official cash rate again while the Federal Reserve could hike rates again after the increase widely expected from this month's meeting.

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"The trend is still up in terms of dairy prices. The economy is looking robust" said Sheldon Slabbert, sales trader at CMC Markets.


The yield premium on New Zealand 10-year government bonds compared to 10-year Treasuries has narrowed to 86 basis points from about 183 points at the start of the year, with US yields surging on the prospects of inflation in the US as a result of president-elect Donald Trump's policies.

"You cannot discount one more rate cut here over the next six months. If the Fed hikes this month as they are expected to, then there's the question of another rate hike in 2017," Slabbert said. Still, he said the kiwi could test 72 US cents and is unlikely to fall well below 70 cents in the next few months, excluding shocks such as a selloff in equity markets.

The New Zealand dollar has recovered from a dip in the wake of Prime Minister John Key's resignation on signs of an orderly changing of the guard, after Finance Minister Bill English, Health Minister Jonathan Coleman and Corrections Minister Judith Collins put their caps in the ring for a National Party caucus vote.

"At least there's a clear path of succession which takes away some of the uncertainty," Slabbert said. "If there was a vacuum - that's what the market doesn't like."

The kiwi fell to 66.44 euro cents from 67.34 cents late yesterday. It rose to 95.82 Australian cents from 95.38 Australian cents after the Reserve Bank of Australia kept its key rate unchanged as expected.

The kiwi rose to 4.9115 yuan from 4.8902 yuan, gained to 81.36 yen from 80.59 yen and advanced to 56.11 British pence from 55.90 pence.

The two-year swap rate rose 1 basis point to 2.23 percent and the 10-year swap rate rose 4 basis points to 3.33 percent.