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NZ dollar extends decline after IMF says kiwi as much as 25% overvalued

Thursday 27th May 2010

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The New Zealand dollar extended its decline after the International Monetary Fund said the currency was overvalued by between 10% and 25%, prompting a kneejerk reaction among investors to sell off their holdings in the kiwi.  

The prospect of higher interest rates in New Zealand has stoked investor appetite in the kiwi dollar, and the IMF said looming rate hikes by the central bank have underpinned gains in the currency. Still, the agency said this might only be a temporary phenomenon when the rest of the world starts tightening monetary policy. Reserve Bank Governor Alan Bollard said he will start lifting the official cash rate around “the middle of the year” with stronger export receipts helping drive the economic recovery, and investors are betting he will boost rates by 144 basis points this year, according to the Overnight Index Swap curve.  

“There was a kneejerk reaction to sell the New Zealand dollar, which ended as one of the weaker currencies on the day,” said Mike Jones, strategist at Bank of New Zealand. “The kiwi is overvalued by around 15%, but in a typical cycle it’s overvalued for three-to-five years.” 

The kiwi sank to 66.29 US cents from 66.98 cents yesterday, and fell to 64.82 on the trade-weighted index of major trading partners’ currencies from 65.22. It declined to 59.59 yen from 60.41 yen yesterday, and decreased to 80.59 Australian cents from 80.84 cents. It edged up to 54.44 euro cents from 54.36 cents yesterday, and was down to 46.09 pence from 46.45 pence.  Jones said the currency may trade between 66 US cents and 66.80 cents today, with investor sentiment the driving factor.  

Risk aversion settled down during the London and New York sessions, with the Organisation for Economic Cooperation and Development lifting its outlook for global growth and reminding investors that the world is still in recovery-mode. It expects global economic growth of 4.6% this year 4.5% next year, up from the 3.4% and 3.7% previously forecast.  

New Zealand probably posted a trade surplus of $455 million last month, according to a Reuters survey, with exports of $3.9 billion. Still, BNZ’s Jones said the trade data will be unlikely to shift the currency today.  

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