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NZ dollar jumps to five-month high vs euro after ECB cuts rates, signals easing bias

Friday 8th November 2013

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The New Zealand dollar jumped to its highest in more than five months against the euro after the European Central Bank unexpectedly cut its benchmark interest rate and signalled monetary policy will remain accommodative.

The kiwi touched 62.83 euro cents early this morning, its highest since May 29, and was trading at 62.08 cents at 8am in Wellington, from 61.84 cents at the 5pm market close yesterday. The local currency slipped to 83.37 US cents from 83.54 cents yesterday after data showed the US economy accelerated in the third quarter.

European Central Bank head Mario Draghi yesterday cut borrowing costs to a record low 0.25 percent citing concern about low inflation and said the bank expects rates to remain at present or lower levels for an extended period. That makes the kiwi a more attractive bet for investors, with New Zealand's central bank set to hike rates next year.

"We saw quite sharp gains in the kiwi against the euro with the ECB cutting rates," said Bank of New Zealand currency strategist Mike Jones. "We think there is a good chance kiwi/euro could break away to the upside now, not just because the ECB has cut rates but more importantly it has retained an easing bias - it's talking up a prolonged period of low inflation and seems prepared to ease policy further in the future so it's not looking as bright as it once was for the euro zone."

"With New Zealand economic indicators all very strong I think there is a good chance the kiwi/euro probably heads back up towards that 64 mark over the coming six months or so," Jones said.

The US dollar index, which measures the greenback against a basket of currencies, has retraced some of the gains it made following a report showing the US economy expanded at a 2.8 percent annual pace in the third quarter, ahead of the 2.0 percent rate expected in a Reuters poll of economists and the strongest gain in 12 months.

Traders are awaiting a key October jobs report in the US today which will show how the economy weathered the partial government shutdown in the first half of the month.

"The currency market is a little bit flighty, probably in large part because we have got US non-farm payrolls due tonight and that always keeps traders a little bit wary," said BNZ's Jones. "The kiwi is chopping around in a sideways range at the moment we really have to wait and see what those numbers bring tonight."

Economists expect the US economy added 120,000 jobs with small increase in unemployment rate to 7.3 percent.

This afternoon, traders will be eyeing data from China on October imports, exports and the trade balance to see if previous signs of weakness in exports continued, BNZ's Jones said. Softer figures may weigh on the kiwi.

Over the weekend, data is due on Chinese inflation, industrial production, and retail sales. US Federal Reserve Chairman Ben Bernanke is also scheduled to speak at the International Monetary Fund.

The kiwi was little changed at 88.10 Australian cents from 88.17 cents yesterday ahead of the Reserve Bank of Australia Statement of Monetary Policy today. The RBA kept the key rate unchanged on Tuesday.

The New Zealand dollar slipped to 51.77 British pence from 51.93 pence yesterday after the Bank of England kept its benchmark interest rate on hold. The kiwi declined to 81.55 yen from 82.31 yen yesterday and the trade-weighted index edged lower to 77.51 from 77.62.

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