NZ dollar rises sharply as equities recover on reports of progress on European bank bailouts

Wednesday 5th October 2011

The New Zealand dollar shot up more than one U.S. cent in morning trading in a short-covering rally in response to a rise in the U.S. equity market on news of progress on mechanisms for European bank bailouts.

The kiwi was at 76.12 U.S. cents at 9.30am, up from 74.90 cents at 8am. It had fallen to 74.80 cents, its lowest level since March 24, in overnight trading. It remained below the 75.30 cents at 5pm yesterday.

Reports that European finance ministers had made more progress that thought in recent discussions had triggered a rally in a market that had been sold aggressively for three weeks, said Imre Speizer, senior strategist at Westpac.

The idea that each country could recapitalise its banking system appeared to have been discussed, he said. This was a green light for countries to bailout their banks.

The Financial Times reported that European finance ministers were examining ways of coordinating recapitalisations of financial institutions after they agreed that additional measures were needed to shore up the region’s banks.

The news was mildly positive but it had a big impact on markets that were so oversold, Speizer said. "Market positioning is the biggest factor," he said.

Traders have been worried about French-Belgian bank Dexia SA’s exposure to Greek debt.The U.S. equity market was again in negative territory as the New Zealand day began, but it rose sharply to close up 2.3%.

Earlier prices for all products at Fonterra's latest online auction fell 1.6%, but Mike Burrowes, market strategist at Bank of New Zealand, said that "thanks to a collapsing New Zealand dollar", prices in New Zealand dollar terms rose 7.6% overall.

"We were more in the camp that there may be a large decline in dairy prices in this auction, but that hasn't happened. We see the auction as a net positive," he said.

The kiwi was little changed at 79.42 Australian cents from 79.65 cents at 8am and from 79.44 cents yesterday. It rose to 58.31 yen from 57.64 at 8am and from 57.72 yen yesterday but eased to 56.98 euro cents from 57.64 cents at 8am and 57.06 cents yesterday.

It was at 68.21 on the trade-weighted index from 67.93 yesterday. The kiwi dollar rose to 49.06 British pence from 48.69 pence at 8am and 48.80 pence yesterday.

(BusinessDesk)

BusinessDesk.co.nz

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