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NZ dollar may gain on rebound in global equity markets

By Paul McBeth

Wednesday 1st October 2008

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The New Zealand dollar may halt its decline as a rebound in global equity markets gives investors the confidence to seek higher-yielding, or riskier assets.

The Dow Jones Industrial Average rose 4.7% and the Nasdaq Composite Index jumped 5% yesterday on optimism US lawmakers will salvage a financial rescue package as soon as this week. The NZX 50 Index jumped 2% in early trading in Wellington.

New Zealand's dollar has been popular with the carry trade, where funds borrowed in currencies of nations with low rates, such as Japan, are used to invest in countries offering fatter yields.

"If the equity markets have a good day, they will encourage riskier behaviour," said Tim Kelleher, corporate risk manager at ASB.

The New Zealand dollar fell to 66.93 US cents from 67.22 cents yesterday. Kelleher said it will probably trade in a range of 66.70-67.50 cents today. The kiwi rose to 71.20 yen from 69.50 yen.

If the Congress fails to revive a bailout by Friday, central banks may embark on a globally co-ordinated cut in interest rates, including an early rate cut by the Reserve Bank in New Zealand, Kelleher said.

Most economists expect the Governor Alan Bollard will cut the official cash rate by 50 basis points to 7% at his next review of monetary policy on October 23.

Limbo land

"The failure of the US Congress to agree the bail-out package was a disappointment, and it leaves parts of the financial markets in limbo until the matter is resolved," Bollard said in a statement today.

"The very short-term effects on the New Zealand market are not major," he said. "There could well be medium-term effects on the economy - but we will continue to deal with them through our normal monetary policy process."

Bollard released the statement to reassure markets that the nation's banking system remains sound, though the effects of the global credit squeeze are already biting New Zealand companies.

PGG Wrightson, New Zealand's biggest rural services company, said it is unable to settle the NZ$220 million acquisition of a half stake in Silver Fern Farms because the global credit squeeze was hampering efforts by its banks to complete financing.

The New Zealand Treasury expects New Zealand's economy to climb out of a three quarters contraction in the final three months of the year, helped by lower interest rates and the first tranche of income tax cuts, which came into effect today.

Nick Tuffley, chief economist at ASB, said the tax cuts probably won't help lift the kiwi dollar today.

The dollar is "focused very much on offshore events," he said, "It's nothing new - it's been well known since the Budget."

BusinessWire

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