NZ dollar rally may stall as economic reality of pandemic sets in

The kiwi traded at 66.24 US cents at 5pm in Wellington. Photo / Getty Images

The New Zealand dollar's rally to a six-month high this week may be over as traders look to the looming recession that's set to drag into next year.

The kiwi traded at 66.24 US cents at 5pm in Wellington from 66.74 cents yesterday, trimming its likely gain for the week to 0.8 per cent. The trade-weighted index was at 72.53 from 72.95 yesterday.

The local currency tried to break above 67 US cents this week as relatively upbeat US corporate earnings and some promising trials of covid-19 vaccines gave investors optimism that the pandemic might be manageable and short-lived.

However, heightened tensions between the US and China kept investors uneasy about the global outlook. Weaker than expected US jobs data and mixed earnings weighed on Wall Street and reminded investors that the pandemic's impact may drag on for longer and be harsher than they had hoped.

That uncertainty has seen foreign exchange markets track equities in recent months, as central banks' massive money printing programmes and near-zero interest rates remove any yield differential that would typically make one currency more attractive than another.

For instance, the yield on NZ's 10-year government bond of 0.85 per cent is 0.27 basis points above the 0.58 per cent yield on US 10-year Treasuries.

"The reality is that this virus is not going to be over and done with as quickly as everybody thought," said Martin Rudings, a senior dealer at OMF.

Domestically, Rudings said the impacts of the recession won't be felt until later in the year when unemployment starts rising. While the kiwi will probably consolidate for a while, he expects it will shed some of its recent gains through the rest of the year.

Local data today showed rising exports, particularly dairy products, helped drive a monthly merchandise trade surplus in June. That was helped by a decline in imports, even with the purchase of a naval vessel.

And Ministry of Social Development figures showed the pace of new unemployment claims slowed in the week ended July 17.

The kiwi traded at 93.48 Australian cents from 93.36 cents yesterday, 70.46 yen from 71.52 yen, 57.09 euro cents from 57.63 cents, 52 British pence from 52.39 pence, and 4.6486 Chinese yuan from 4.6750 yuan.

The bid-price on the two-year swap rate was 0.2000 per cent from 0.2075 percent yesterday; the 10-year swap was at 0.6750 per cent from 0.6850 per cent.