NZ dollar holds gains as yield advantage draws investors

The New Zealand dollar held gains in local trading as the country's high interest rates relative to the rest of the world continue to attract investors seeking stable returns.

The kiwi traded at 77.72 US cents at 5pm in Wellington, little changed from 77.80 cents at 8am, and up from 77.56 cents yesterday. The trade-weighted index advanced to 79.07 from 78.86 yesterday.

New Zealand has been a favoured destination for investors with the Reserve Bank's bias to higher interest rates and annual economic growth of about 3.5 percent stoking demand for the local currency as major central banks run extraordinarily loose monetary policies, including quantitative easing programmes to inject life into their respective economies. The yield on New Zealand's 10-year government bonds was recently at 3.71 percent, compared to 2.87 percent in Australia, 0.33 percent in Japan and 2.19 percent in the US.

"Both In an absolute and relative sense, demand from a yield point of view continues - we're finishing 2015 wit the Bank of Japan continuing to conduct QE at its incredibly fast pace," said Robert Rennie, chief currency strategist at Westpac Banking Corp in Sydney. "The kiwi's stretched against the Aussie dollar and I think it's getting stretched on a number of other crosses, but there isn't a compelling argument that says FX markets are about to turn against it."

Reserve Bank of New Zealand data today showed the central bank wasn't active in foreign exchange markets in November, with net purchases of $3 million in the month. The Reserve Bank intervened in currency markets in August when it sold a net $521 million, and governor Graeme Wheeler has been trying to talk down the kiwi, which is holding back export growth for the nation.

Westpac's Rennie said the RBNZ data was another factor supporting the kiwi, which has been outperforming most of its peers and the Australian dollar in particular.

The local currency was trading near a nine-year high 95.62 Australian cents at 5pm in Wellington from 95.40 cents yesterday, and some traders have been eyeing the possibility of the currencies reaching parity in the New Year.

The kiwi rose to 93.64 yen, having touched a seven-year high in Northern Hemisphere trading, from 93.47 yen yesterday, with Japan's currency being devalued by the Bank of Japan's money printing programme and the government's stimulus package approved on the weekend.

The local currency gained to 64.03 euro cents from 63.65 cents yesterday after Greece failed to elect a new president, spurring the country into a new election that could scuttle its bailout programme, which Westpac's Rennie said will prompt investors to shun Europe.

The kiwi advanced to 50.08 British pence from 49.82 pence yesterday, and climbed to 4.8402 Chinese yuan from 4.8262 yuan.