Kiwi Dollar Erases Gain, Swap Rates Fall After N.Z. Earthquake

New Zealand’s dollar erased gains and rates on interest-rate swaps dropped the most in five months after a magnitude 6.2 earthquake struck near the nation’s capital.

The kiwi earlier strengthened as much as 0.5 percent against the greenback as BNP Paribas SA recommended buying the currency on bets the Reserve Bank of New Zealand will turn more hawkish. Australia’s dollar rose against 15 of its 16 major peers as a recovery in iron-ore prices improved the outlook for the nation’s commodity exports.

“As a general rule of thumb, the market tends to overreact to earthquakes in New Zealand specifically and to natural disasters in general,” said Todd Elmer, a foreign-exchange strategist in Singapore at Citigroup Inc. “We expect continued outperformance from the kiwi.”

The kiwi was little changed at 80.74 U.S. cents as of 6:52 p.m. in Wellington from yesterday, after earlier reaching 81.14, the strongest since June 14. The Aussie gained 0.1 percent to 91.55 U.S. cents.

New Zealand’s two-year swap rates, which are seen as a forward-looking indicator for central bank borrowing costs, declined nine basis points, or 0.09 percentage point, to 3.46 percent, the biggest drop since March 13 on a closing basis. They earlier touched a two-year high of 3.55 percent.

The temblor, which hit at 2:31 p.m. local time, was centered at the northern tip of New Zealand’s South Island, about 72 kilometers (45 miles) south of Wellington at a depth of 8 kilometers, according to GNS Science’s Geonet website. It lasted at least 30 seconds and was the third serious tremor to rock Wellington in less than a month.

Quake Impact

Earthquakes in 2010-11 destroyed houses, roads, shops and commercial buildings in the South Island city of Christchurch, prompting a NZ$40 billion ($32 billion) rebuilding program. The most devastating quake in February 2011 killed 185 people.

The kiwi has gained 0.3 percent since Aug. 9 after data released this week showed home prices were near a record high in July and a gauge of manufacturing climbed to a level unseen in nine years. BNP Paribas recommends buying the kiwi at 80.75 U.S. cents, expecting the currency to rise to 84.

“The cyclical story in New Zealand has strengthened considerably recently,” Kiran Kowshik and Steven Saywell, London-based foreign-exchange strategists at BNP, wrote in a research note yesterday. “The housing market remains buoyant and is likely to run stronger than the pace assumed by the RBNZ. We think this is likely to see the central bank turn more hawkish.”

Ore Prices

The price of iron ore rose to $142.80 a metric ton on Aug. 14, the highest in five months and up from this year’s low of $110.4 on May 31, data gathered by the Steel Index Ltd. show.

“We wouldn’t be chasing the Aussie dollar lower at these types of levels,” said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp. The gain in iron-ore prices is “a big turnaround from the lows we saw earlier this year. That’s definitely a positive that will feed through into the trade balance and terms of trade at some stage.”

Citigroup Inc.’s terms of trade index for Australia advanced this week to the highest level since February, signaling prices of commodity exports climbed faster than those of imports.

The Aussie has fallen 0.7 percent this week. The Reserve Bank of Australia on Aug. 20 will release minutes of its Aug. 6 meeting when it cuts the overnight cash-rate target by a quarter percentage point to a record 2.5 percent. The exchange rate remains at a high level and may depreciate further over time, the RBA said in a statement.

Aussie Linkers

“The RBA’s been cutting rates, and the interest-rate differential has narrowed,” said Janu Chan, an economist at St. George Bank Ltd. in Sydney. “We expect the Aussie to fall.”

Australian inflation-linked bonds are poised for their first annual loss on record as a slowdown in the economy curbs prices and wages. The securities have fallen of 3.7 percent in 2013, according to a Bank of America Merrill Lynch index set up in 1997.

“I wouldn’t be buying” linkers in Australia, said Ali Jalai, a bond trader in Singapore at Scotiabank, a unit of Canada’s Bank of Nova Scotia “I don’t think inflation’s a big deal in Australia. Their economy is slowing down. I would just be buying normal bonds.”

The 10-year Australian government bond yield rose eight basis points to 3.97 percent after touching 3.99 percent, the highest since July 8.

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