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NZ dollar surges against British pound, euro after central banks highlight easing bias

Friday 5th July 2013

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The New Zealand dollar surged against the British pound and the euro after central banks there highlighted their easing bias, increasing demand for the higher yielding local currency as rates in New Zealand are set to climb.

The kiwi rose to a month high of 52.17 British pence, and recently traded at 51.95 pence, from 50.97 pence at the 5pm market close in Wellington yesterday. The local currency also jumped to a three-week high of 60.85 euro cents, recently trading at 60.67 cents from 59.87 cents yesterday. It rose to 78.35 US cents from 77.79 cents.

European Central Bank president Mario Draghi said present or lower level of interest rates were to continue for as long as possible while the Bank of England said an implied rise in the expected future path of the benchmark rate was not warranted by recent developments in the domestic economy. The statements spurred investors to buy higher yielding currencies such as the kiwi, in what is known as the carry trade.

"Both the ECB and the BOE issued a form of forward guidance and reiterated accommodative policy is entrenched in Europe and the UK," Sharon Zollner, senior economist at ANZ New Zealand, said in a note. "This saw markets re-enter carry trades in GBP and EUR vs. NZD."

The benchmark rates in Europe and Britain are at a record low 0.5 percent while New Zealand's official cash rate is at a record low 2.5 percent. Traders are betting New Zealand's Reserve Bank will raise the benchmark interest rate by 64 basis points in the next 12 months, based on the Overnight Interest Swap curve.

US markets were closed on Thursday for Independence Day meaning most attention will be on the euro and the pound, with the kiwi poised to rise against both, ANZ's Zollner said.

Tonight, traders will be eyeing a key employment report in the US for signs of improvement that may prompt the Federal Reserve to pull back on its US$85 billion a month asset purchase programme.

June US non-farm payrolls may have fallen 10,000 to 165,000 in June from May, while the unemployment rate is predicted to fall to 7.5 percent from 7.6 percent, according to Reuters polls. Fed chairman Ben Bernanke has made 7 percent the target for beginning to ease stimulus efforts.

The New Zealand dollar rose to 85.62 Australian cents from 85.40 cents yesterday even after Reserve Bank of Australia deputy Philip Lowe said markets had misinterpreted comments by governor Glenn Stevens that suggested a decision on whether to hold interest rates this week was a close call.

The kiwi advanced to 78.28 yen from 77.68 yen yesterday. The trade-weighted index gained to 74.72 from 74.07 yesterday.

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