The New Zealand dollar has gained almost 4 per cent against the US dollar this month, boosted by strong dairy prices, a planned boost to government infrastructure spending, improved business confidence and stronger than expected third-quarter GDP data last week.
Mitchell McIntyre, a trader at XE, said the kiwi's latest gains reflect a trend underway since the Reserve Bank surprised the market on November 13 by holding rates rather than cutting.
Investors short the kiwi – expecting it to fall further – have had to buy it back.
"There were a lot of shorts to be unwound and there's probably still a bit of that going on," he said.
Equity markets have rallied strongly in recent weeks as the US and China neared an interim deal that could end the trade war US President Donald Trump kicked off in April 2018 by imposing punitive tariffs on Chinese goods.
Yesterday, China's Commerce Ministry said it is working closely with US officials to complete the preliminary trade agreement.
China, New Zealand's biggest trading partner, earlier this week reduced import tariffs on 859 items effective Jan. 1. On Tuesday, Trump said the deal was "done" and only required translating before he and President Xi Jinpeng would sign it. US officials previously signalled the deal could be signed in the first week of January.
XE's McIntyre said the kiwi dollar had spent weeks stuck in a tight range until progress on the US-China trade front earlier this month saw it "explode to the upside."
While promising talks had disappointed before, "the market's taken all the information it has onboard and it has rallied."
Despite the strong gains, BNZ noted the kiwi dollar had barely kept pace with fundamentals which it said now valued it at more than 71 US cents short-term.
"While some consolidation might be in order, the scope remains for further gains," senior market strategist Jason Wong said in a note.
The New Zealand dollar was at 96.02 Australian cents from 96.01 cents yesterday. It was at 51.35 British pence from 51.32, at 60.05 euro cents from 60.08, at 73.08 yen from 73.11, and at 4.6745 Chinese yuan from 4.6633.
The two-year swap rate rose to a bid price of 1.2525 per cent from 1.2150 per cent yesterday while 10-year swaps nudged up to 1.7450 per cent from 1.7400 per cent.
