The New Zealand dollar extended its recent gains as commodity currencies rallied on the prospect of a US-China trade deal next week and as year-end profit-taking saw the US dollar sold-off.
The kiwi, already at a five-month high, was trading at 67.34 US cents at 1pm in Wellington, up from 67.11 cents late yesterday. The trade-weighted index rose to 73.64 from 73.44.
"All the commodity currencies rallied" and the US dollar index is looking "quite heavy," said Tim Kelleher, head of institutional foreign exchange sales at Commonwealth Bank of Australia.
"I think the market has finally figured out that the potential for rate cuts in New Zealand and Australia are significantly reduced," he said.
"We've also seen some profit-taking on currency positions going into the end of the year."
China is the biggest trading partner of both New Zealand and Australia. Vice-Premier Liu He has accepted an invitation to lead a delegation to the US on Saturday for the signing of an interim trade deal between the two countries, the South China Morning Post reported.
Neither states have confirmed the report, which would signal a dialling back of the tensions in the 20-month trade war. White House trade advisor Peter Navarro told Fox News he expected the deal would be signed "within the next week or so."
The kiwi dollar has gained almost 4.8 per cent this month as prospects for a preliminary trade deal between the US and China firmed and as rising business confidence, stronger than expected GDP data and increased infrastructure spending improved the outlook for the domestic economy.
After falling below 62.50 US cents in October, the kiwi will end the year marginally ahead of where it started 2019. It had briefly traded above 69 US cents late in January and in March.
Commonwealth's Kelleher said thin, holiday liquidity may have exaggerated some of the currency moves in recent days, which have included investors unwinding short positions they had held on the New Zealand and Australian dollars.
Hedge funds tend to take new positions in January and that may be happening "a couple of days early" judging by the size of some of the moves, he said.
The US dollar index fell 0.2 per cent to 96.74 - near its July lows – despite an unexpected improvement in the country's November trade deficit.
The deficit shrank to US$63.2 billion from US$66.8 billion in October. It was the smallest deficit since October 2016 and a stark contrast to the US$68.8 billion expected in a Reuters poll of economists. Exports rose 0.7 per cent while imports were down 1.3 per cent.
Kelleher said a lot had been built into the kiwi on the back of the interim China-US deal, the terms of which were still unknown and which would take some time to be reflected in actual trade flows. He doubted the kiwi would readily push through the highs it reached mid-year.
"It's got a lot of wood to chop to get through 67.50-68" cents, Kelleher said.
The New Zealand dollar was 96.15 Australian cents from 96.01 cents yesterday. It was at 51.34 British pence from 51.15, at 60.09 euro cents from 59.92, at 73.32 yen from 73.22, and at 4.7046 Chinese yuan from 4.6825.
The two-year swap rate rose to a bid price of 1.2505 per cent from 1.2486, while 10-year swaps rose to 1.7750 from 1.7500.