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NZ dollar sinks as data boosts outlook for US, ahead of QSBO

Tuesday 6th April 2010

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The New Zealand dollar sank after strong American manufacturing and employment data underpinned a resurgence in US interest rate markets and propped up the greenback, as local investors prepare for the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion this morning.

The kiwi dropped 0.5% against the US dollar as strong manufacturing and services data, along with better underlying data in non-farm payrolls, stoked investors’ optimism that the world’s largest economy is recovering faster than expected and analysts have brought forward their expectations for a rate hike by the Federal Reserve. The yield on 10-year US government bonds pushed towards 4%, the highest in 10 months, while New Zealand’s interest rates are expected to remain static, with central bank Governor Alan Bollard indicating he won’t hike rates until the middle of the year.

“The interest rate differential between New Zealand and the US narrowed after the strong US data saw a savage sell-off in US yields,” said Khoon Goh, senor markets economist at ANZ National Bank. More positive US data will cause the markets to reassess their “Fed expectations about future rate hikes” and keep the kiwi under pressure, he said.

The kiwi sank to 70.26 US cents from 70.63 cents last week, and dropped to 65.40 on the trade-weighted index, or TWI, from 65.65 last week. It slipped to 66.21 yen from 66.36 yen last week, and declined to 76.31 Australian cents from 76.82 cents. It dropped to 45.94 pence from 46.34 pence last week, and was little changed at 52.09 euro cents from 52.15 cents.

Goh said the currency may trade between 70.10 US cents and 70.90 cents today, with the QSBO likely to show firms remained optimistic about the outlook for New Zealand’s economy in the first three months of this year. Still, he warned businesses’ own activity may be weaker than expected, and said that will be worth watching in the survey.

The Reserve Bank of Australia will review its target cash rate today and is expected to hike rates another 25 basis points. Australia’s central bank was the first G-20 nation to tighten monetary policy after the so-called ‘lucky country’ dodged a recession amid strong Chinese demand for its raw materials, and Governor Glenn Stevens last week indicated he was keen to get the policy setting back to neutral sooner rather than later.

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