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NZ dollar trades near five-month low ahead of PM's speech on tax

Tuesday 9th February 2010

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The New Zealand dollar held above its five-month low ahead of Prime Minister John Key’s speech today which is expected to unveil the direction of the government’s tax and economic policy.  

Key is likely to target rental property owners as a way to offset cuts to the top personal tax rate when he gives his speech to open Parliament this afternoon. Reserve Bank Governor Alan Bollard has been calling for the government to rein in its fiscal spending and to remove tax incentives for home ownership to remove some of the pressure on monetary policy. The kiwi dollar will probably come under some downward pressure if the government’s tax scheme dampens demand for housing, as markets price in fewer hikes to the official cash rate.  

“If there’s anything of substance in his (Key’s) seven tax changes, through the chain of causality, it would be bearish for interest rates and the currency” as it removes the burden on monetary policy and reduces the need for rate hikes, said Imre Speizer, markets strategist at Westpac Banking Corp. “If there’s a substantial tax change, people could be surprised and may price it quite severely into the rate market.”  

The kiwi dropped to 68.64 U.S. cents from 69.03 cents yesterday, and declined to 63.79 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 64.14. It fell to 61.30 yen from 61.78 yen yesterday, and decreased to 79.01 Australian cents from 79.35 cents. It slipped to 50.14 euro cents from 50.38 cents yesterday, and was down to 43.90 pence from 44.19 pence.  

Speizer said the currency may trade between 68.60 U.S. cents and 69.10 cents today, though if the Prime Minister’s speech was bearish for interest rate markets, it could see the kiwi test 68 cents.  

“It’s generally in a consolidation phase – the kiwi has been oversold in the last day or two and its struggled to get much lower,” he said.  

Global markets remain concerned about the state of Europe’s debt woes, with investors sceptical about the Group of Seven nations’ assurances that the crisis was under control.

Still, equity markets in Europe and the U.S. edged higher amid stronger prices for raw materials, while America’s Treasury Secretary Tim Geithner said in an interview on ABC the world’s largest economy is in no danger of losing its AAA credit rating.

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