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NZ dollar sinks as stocks decline amid Goldman Sachs charges

Monday 19th April 2010

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The New Zealand dollar sank below 71 US cents after stocks on Wall Street declined on the move by the US Securities and Exchange Commission to charge investment bank Goldman Sachs Group with fraud.  

Wall Street’s regulator alleges Goldman Sachs failed to disclose securities it sold that were linked to the sub-prime market were chosen by a hedge fund manager who then bet their value would drop.

The Dow Jones Industrial Average sank 1.1%, while the Thomson Reuters/Jeffries CRB index, a broad measure of 18 raw materials, dropped 1.3%.

The kiwi dollar tumbled 1% as investors eschewed higher-yielding, or riskier, assets, though it may record a knee-jerk rebound if tomorrow’s first-quarter consumer price index data comes in above the 0.6% increase expected by the market.  

“The allegations of fraud sent markets into a tail-spin and there are ongoing fears for what this means for the U.S. banking sector in general,” said Mike Jones, strategist at Bank of New Zealand. “In that environment, investors bought U.S. dollars and sold riskier assets like the New Zealand dollar and the Australian dollar.”  

The kiwi sank to 70.73 US cents from 71.47 cents on Friday in New York, and dropped to 65.58 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 66.04. It tumbled to 65.00 yen from 66.26 yen last week, and edged up to 76.68 Australian cents from 76.63 cents. It was little changed at 46.22 pence from 46.24 pence on Friday, and dropped to 52.44 euro cents from 52.76 cents.  

Jones said the currency may trade between 70.20 US cents and 71 cents today as investors prepare for tomorrow’s CPI data.

Investors are betting the Reserve Bank of New Zealand will hike the official cash rate by 162 basis points in the coming 12 months, according to the Overnight Index Swap curve, and if CPI is higher than expected, this will probably spark a “knee-jerk reaction” supporting the kiwi, Jones said.  

Still, the central bank focuses on medium-term inflation, and unless the data is “very strong” it probably won’t force Governor Alan Bollard to bring forward the timing of a rate hike, Jones said.  

Weaker than expected first-quarter earnings in the US, particularly from Google, also weighed on risk appetite, and the Chicago Board of Exchange Volatility Index, or VIX, commonly known as Wall Street’s ‘fear gauge’, surged 16% on Friday in New York.  

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