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NZ dollar hits 27-month high as markets waver over QE2

Monday 1st November 2010

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The New Zealand dollar rose to a 27-month high as traders look ahead to the Federal Reserve’s decision this week on whether to print more money and how big the stimulus package will be.  

Markets are edgy as they prepare for the Federal Open Market Committee to embark on its second round of quantitative easing in what’s been dubbed ‘QE2’. While investors expect the programme to be a certainty, questions remain over the size and scope, with a Reuters poll predicting the Fed will print between US$80 billion and US$100 billion of money a month. That comes as investors pare back their forecasts for a rate hike by the Reserve Bank of Australia tomorrow, helping bolster demand for the kiwi from traders seeking bigger returns.

“The Fed’s painted themselves into a corner to do QE2 – the issue now is whether it pleases or disappoints the market,” said Khoon Goh, head of market economics and strategy at ANZ New Zealand. “I wouldn’t be surprised to see three or four big figure movements in the kiwi this week, given how much key risk event there he,” he said referring to trader’s jargon for 100 basis point moves.

The kiwi rose to 76.50 US cents from 75.49 cents on Friday in New York, and earlier reached as high as 76.68 cents. It gained to 67.65 on the trade-weighted index of major trading partners’ currencies from 67.08. It advanced to 77.67 Australian cents from 77.37 cents last week, and increased to 61.43 yen from 60.82 yen. It rose to 54.79 euro cents from 54.36 cents last week, and was up to 47.68 pence from 47.39 pence.

Goh said the currency may trade between 76.20 US cents and 77.20 cents today with Chinese manufacturing data the main risk on the day, amid questions over whether the world’s second-biggest economy will continue to moderate its growth.

Traders are betting Australia’s yield advantage over New Zealand will decline over the coming 12 months with the Reserve Bank of Australia expected to hold its target cash rate at 4.5% tomorrow. The RBA was the first Group of 20 nations country to start tightening policy when it dodged recession last year. Investors are picking the RBA to lift its benchmark rate 41 basis points over the next year, while New Zealand’s central bank is priced into to hike the official cash rate by 76 basis points, according to the Overnight Index Swap curve.

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