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NZ dollar may gain against Yen on US rescue package

By Paul McBeth

Monday 29th September 2008

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The New Zealand dollar may rise on the prospect of the US$700 billion financial rescue package’s approval by Congress, giving investors more confidence to buy high yield assets funded with loans in Japan’s currency.

US lawmakers are reviewing the agreement reached over the weekend, and had hoped to have the proposal ready in time for the opening of the Asian markets. Once they have reached agreement, the legislation will be voted on in the House as soon as today.

“Expect to see a knee-jerk rally in global equity markets and an improvement in investor confidence will likely underpin crosses like NZD/JPY,” said Danica Hampton, currency strategist at Bank of New Zealand. “At the same time it will bolster the US economy,” strengthening the US dollar against the kiwi.

The New Zealand dollar recently traded at 72.75 yen and has dropped from more than 81 yen in July. It rose to 68.75 US cents from 68.60 cents in New York on Friday.

As the Reserve Bank continues to cut the official cash rate (OCR), Hampton predicts the kiwi will continue its downward trend, falling to 62 cents by the end of the year, and 60 cents by early 2009.

The central bank began loosening monetary policy in July by cutting 25 basis points from the OCR, and reduced it by a further 50 points earlier this month. BNZ head of research Stephen Toplis expects the central bank will lower the rate by 50 points to 7% next month.

Figures last week confirmed New Zealand’s economy is in recession and the Treasury has predicted it won’t revive until the fourth quarter. BNZ’s Toplis said the economy may shrink 0.5% in the third quarter.

Investors will get more evidence of the pace of the economy today, with the release of merchandise trade and credit aggregate figures for August.

Exports may have slowed, reflecting the impact of drought on farm output, while weakening domestic economy and lower oil prices trim imports. The credit aggregates may show personal credit growth is continuing to slow, said Shamubeel Eaqub, economist at Goldman Sachs JBWere.

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