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NZ dollar declines as Greece begins talks with IMF over funding crisis

Thursday 22nd April 2010

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The New Zealand dollar declined as talks between Greece and the International Monetary Fund got underway over the Mediterranean’s funding crisis, spooking investors who returned to so-called ‘safe havens’ such as the greenback and yen.

Greek bond spreads widened to a record high 500 basis points above German 10-year bunds as investors bet on the increasing likelihood of a default, after officials from the debt-stricken nation entered into discussions with the IMF on how it can hammer out an aid deal.

The aid agency warned that Greece’s problems could seep into other troubled European nations, and 10-year spreads widened on Spanish and Portuguese bonds.

The Dollar Index, a measure of the greenback against a basket of six currencies, rose 0.2% to 81.21 as investors eschewed higher yields.  

“The improving global backdrop was overshadowed by the continued focus on Greece and its difficulties with fiscal debt concerns,” said Mike Jones, strategist at Bank of New Zealand.

“That provided a bit of a drag for the kiwi” which spent much of the New York and London sessions consolidating, he said.  

The kiwi dropped to 70.97 U.S. cents from 71.28 cents yesterday, and declined to 65.92 on the trade-weighted index major trading partners' currencies, from 66.07.  It fell to 66.11 yen from 66.53 yen yesterday, and edged up to 76.52 Australian cents from 76.38 cents.

It was little changed at 53.01 euro cents from 53.65 cents yesterday, and slipped to 46.09 pence from 46.21 pence.  Jones said the currency may trade between 70.80 U.S. cents and 71.40 cents today as investors begin looking towards next week’s official cash rate review by the Reserve Bank of New Zealand.

Markets are pricing in 159 basis points of hikes in the coming 12 months, according to the Overnight Interest Swap curve, though investors seem to be split on whether Governor Alan Bollard will begin tightening in June or July.  

“I think he (Bollard) will kick for touch, and not offer any direction. He’s said he’ll go in the middle of the year and I think he’ll let markets make up their own minds” by not offering any guidance, Jones said.  

Still, the prospect of higher interest rates in New Zealand will probably underpin support for the kiwi as tighter monetary policy draws near, and Jones said the carry trade will rear its head later in the year.  

“Toshin funds are increasingly in vogue in Japan again, though that’s mostly Australian and emerging markets orientated,” Jones said. “There’s going to be more of these in New Zealand when the RBNZ increases interest rates.”

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