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NZ dollar extends decline amid fears of Greek contagion, holds up on crosses

Thursday 6th May 2010

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The New Zealand dollar extended its decline against the greenback amid fears the debt crisis in Greece may spread to other European nations, sapping investors’ appetite for higher-yielding, or riskier, assets.

Rating agency Moody’s Investor Services followed Standard & Poor’s and Fitch Ratings in putting Portugal on notice of a potential downgrade to its sovereign credit rating. The 10-year government bonds of Greece, Portugal and Ireland rose 78 basis points, 34 bps, and 28 bps respectively as investors got more nervous about Greece’s problems spilling over into other nations amid public opposition to its planned austerity measures. Though the kiwi dollar sank against the greenback, it held up against the euro, pound and Australian dollar as exporters bought the currency as part of their hedging contracts.  

“Moody’s put Portugal at risk of a downgrade” amid ongoing fears about Greece’s debt problems spreading, and that has sapped investor confidence, said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “The market showed some interest in buying the kiwi on dips – exporters are buying it and it looked strong on the crosses.”  

The kiwi dropped to 71.69 US cents from 71.91 cents yesterday, and was little changed at 67.84 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 67.91. It tumbled to 67.15 yen from 68.14 yen yesterday, and gained to 79.12 Australian cents from 78.99 cents. It climbed to 55.90 euro cents from 55.43 cents yesterday, and was unchanged at 47.44 pence.  

Kelleher said the currency may trade between 71.40 US cents and 71.90 cents today, with Reserve Bank Governor Alan Bollard’s speech the main event risk of the day. Bollard will expand on his statement in the official cash rate review last week, and investors will be looking for any hints as to when the central bank will start tightening monetary policy.

Investors are betting the RBNZ will hike the OCR by 195 basis points over the coming 12 months, according to the Overnight Interest Swap curve.  

New Zealand’s unemployment rate probably held at a 17-year high 7.3% in the first three months of this year, according to a Reuters survey. Employment growth is expected at 0.2%, after a 0.1% decline in the previous quarter. If the data shows the labour market picked up faster than expected, investors will keep backing a rate hike in June. Market pricing gives a 75% chance to an OCR rate hike at the next meeting. 

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