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NZ dollar climbs above 77 US cents as Fed's QE2 looms

Wednesday 3rd November 2010

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The New Zealand dollar climbed above 77 US cents as markets gear up for the Federal Reserve’s second round of quantitative easing, after central banks in Australia and India boosted interest rates.  

The Fed will tomorrow announce its latest asset purchase programme, which has been dubbed ‘QE2’, in a bid to revive a sagging recovery in the US Traders are betting the central bank will print about US$500 billion over the next three-to-six months. That comes amid the US mid-term elections, which will decide the make-up of Congress, a third of the Senate, and two-thirds of state governors. Investors’ appetite for riskier, or higher-yielding, assets increased ahead of the decision, with unexpected rate hikes from the Australian and Indian central banks in a bid to cool inflation in the two economies off.

“Expectations (on the outcome of the elections and the Fed’s QE2) were the driver for the market last night which pushed risk higher,” said Imre Speizer, markets strategist at Westpac Banking Corp. “Stripping out the effects of the US dollar, the kiwi is looking strong” and should extend its gains, he said.

The kiwi climbed as high as 77.38 US cents, a 29-month high, and recently traded at 77.07 cents from 76.59 cents yesterday. It advanced to 67.94 on the trade-weighted index of major trading partners’ currencies from 67.63 yesterday, and rose to 77.18 Australian cents from 76.68 cents. It increased to 62.19 yen from 61.75 yen yesterday, and was little changed at 54.91 euro cents from 54.95 cents. It gained to 48.11 pence from 47.67 pence yesterday.

Speizer said the currency may trade between 76.40 US cents and 77.40 cents today, though top-side resistance is expected to be light and “there aren’t many upside obstacles until you get to 82 US cents.”

The kiwi dollar recovered losses against its trans-Tasman counterpart as traders reassess the Reserve Bank of Australia’s thinking on interest rates after it took the market by surprise and yesterday lifted the target cash rate a quarter-point to 4.75%. New Zealand’s recovery is expected to accelerate next year, putting pressure on the Reserve Bank of New Zealand to tighten monetary policy faster than the forecast track.

Still, traders are betting Australian rates will keep most of their yield advantage in the coming year, pricing in 58 basis points of hikes by the RBA to the 78 point increase for the RBNZ, the Overnight Index Swap curve show. At 3%, the RBNZ’s official cash rate is 175 basis points behind the RBA’s benchmark rate.

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