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NZ dollar grinds above 73 US cents as commodities, strong US data stoke appetite

Tuesday 4th May 2010

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The New Zealand dollar pushed above 73 US cents as surging local commodity prices underpinned support for the kiwi currency, while strong US data stoked investors’ appetite for riskier, higher-yielding assets.  

The price of raw materials produced in New Zealand climbed 4.9% to a record high last month in a "strongly synchronised" boost for commodities, according to the ANZ Commodity Price Index, as milk prices continued to attract investors in the kiwi dollar.

Fonterra Cooperative Group will hold this month’s auction on its online trading platform today in the US, and with prices up to a 21-month high any sign of them levelling off will be supportive for the kiwi.

Equity markets in the US and in Europe gained as strong American manufacturing data stoked investors’ appetite for risk. 

“The surge in commodity prices set the kiwi up for a very strong night – prices are at record levels and looking to press higher still,” said Mike Jones, strategist at Bank of New Zealand.

“Even if (Fonterra’s) prices hold steady it will be a positive result – we expect it will be a tough ask for prices to move from current levels, and that’s indicative of further upward pressure on the pay-out (to farmers).” 

The kiwi gained to 73.09 US cents from 72.89 cents yesterday, and climbed to 68.42 on the trade-weighted index,  of major trading partners' currencies, from 68.10.

It jumped to 69.15 yen from 68.56 yen yesterday, and increased to 78.94 Australian cents from 78.69 cents. It advanced to 55.39 euro cents from 55.07 cents yesterday, and edged up to 47.94 pence from 47.85 pence.  

Jones said the currency may trade between 72.30 US cents and 73.20 cents today, with the major event risk being whether the Reserve Bank of Australia will hike its target cash rate a further 25 basis points to 4.5%.

With the Australian economy surging on the back of strong Chinese demand for raw materials, Jones says Governor Glenn Stevens may indicate that rates need to go above average levels.  

“For the rest of the year, it’s hard to see kiwi rates heading above Australian rates,” Jones said.  

Investors are betting the RBA will hike rates by 99 basis points over the coming 12 months, according to the Overnight Interest Swap curve, and have priced in 202 basis points worth of increases by the Reserve Bank of New Zealand. Australia’s target cash rate is 175 basis points above New Zealand’s official cash rate.

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