The New Zealand dollar lost the best part of a US cent today before recovering a little after Deputy Prime Minister and Foreign Minister Winston Peters stirred up China by saying he supports Taiwan's inclusion in the World Health Organisation.
The spat comes as Australia and China are feuding over the former's support for an inquiry into China's role in spreading Covid-19. The dispute has spilled over into trade, with China suspending Australian meat imports and accusing Australia of dumping barley.
The kiwi was trading at 60.75 US cents at 5pm in Wellington, off the day's low at 60.46 cents, and down from 61.42 cents at the same time yesterday. The trade-weighted index was at 68.82 from 69.24 yesterday.
China's suspension of imports from four large red meat abattoirs in Australia is being viewed as a response to Prime Minister Scott Morrison joining the US to push for an independent coronavirus inquiry.
The Covid-19 pandemic is believed to have started at a market in the city of Wuhan and while US intelligence officials have said the virus wasn't man made, US President Donald Trump has claimed without evidence that it was and had escaped from a laboratory in the city.
"We saw quite a strong sell-off overnight," said Tim Kelleher, head of foreign exchange sales at Commonwealth Bank of Australia. "The Aussie's gone a bit harder but we're in the same boat," he said. "We just don't need to have Winston piping up."
China is the largest trading partner of both Australia and New Zealand and Australia is NZ's second-largest trading partner.
The China trade worries have flared up as New Zealand heads into an action-packed couple of days with the Reserve Bank releasing its monetary policy statement tomorrow afternoon and the government delivering its annual budget on Thursday.
Kelleher said it didn't help sentiment that US equities futures have also turned negative.
Of late, the dominant driver of the domestic currency has been sentiment in global equities markets with the kiwi, which is viewed as a proxy for risk-on investment, benefiting when equities markets rise and suffering when they fall.
The New Zealand dollar was trading at 93.95 Australian cents from 93.71 cents at 5pm yesterday. It was at 49.29 British pence from 49.42 pence, at 56.20 euro cents from 56.61 cents, at 65.23 yen from 65.70 yen and at 4.3088 Chinese yuan from 4.3508 yuan.
The bid price on the two-year swap rate closed at 0.1625 per cent from 0.1500 per cent yesterday while 10-year swaps were at 0.7100 per cent from 0.7125 per cent.