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Dollar sinks on grim outlook for PIGS

Wednesday 28th April 2010

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The New Zealand dollar sank 1.4% after ratings agency Standard & Poor’s gave a grim assessment on the so-called PIGS’ debt positions and downgraded Greece and Portugal. 

S&P cut Greece two notches to a junk rating of BB+ and warned that any debt restructuring could see bondholders recover as little as 30 cents in the dollar. It then cut Portugal two notches to an A- rating, raising fears that sovereign debt concerns were spreading to other PIGS (Portugal, Ireland, Greece and Spain).

The yield on Greek to-year government debt has soared to more than 16% from just 5.15% at the start of the month. Equities in the US and Europe slumped as investors eschewed higher yields in favour of so-called safe havens such as the greenback. The Dollar Index, a measure of the US dollar against a basket of six currencies, surged 0.9% to 82.36.  

“It was pretty ugly and there was nowhere to hide except in the expected safe havens like US Treasuries,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia.

“The kiwi had a key day reversal – where it made a new high during the day then closed below yesterday’s low – and that’s a very bearish signal for the currency.”  

The kiwi sank to 71.09 US cents from 72.09 cents yesterday, and slumped to 66.60 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 67.20. It dropped to 66.23 yen from 67.54 yen yesterday, and declined to 77.72 Australian cents from 77.99 cents. It fell to 53.92 euro cents from 54.13 cents, and retreated to 46.58 pence from 47 pence.  

Kelleher said the currency may trade between 70.80 US cents and 71.30 cents today, with further weakness in the kiwi expected.  “Anything back toward 71.50/72 US cents, we’ll be looking to sell,” he said.  

The threat of contagious debt issues in Europe will take the focus of local news, with the Reserve Bank of New Zealand reviewing the official cash rate tomorrow, and Australian consumer price index data out today.  

Kelleher said the Australian CPI number will be important for the New Zealand/Australian dollar cross, and if it comes in higher than expected, that would raise the prospect of another rate hike by the Reserve Bank of Australia. Australian inflation probably accelerated to 0.8% in the first three months of the year, according to a Reuters survey.  

Investors are betting the RBA’s Governor Glenn Stevens will hike rates by 88 basis points over the coming 12 months, according to the Overnight Interest Swap curve, and they’ve priced in 188 points of hikes by his New Zealand counterpart.

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