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NZ dollar sinks to five-month low as European fiscal fears dominate

Friday 5th February 2010

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The New Zealand dollar sank to a five-month low as ongoing fears about the state of Spain’s and Portugal’s economies sapped investors’ appetite for higher yields, extending the kiwi’s slide from yesterday, when figures showed higher-than-expected unemployment. 

Stocks markets sank and the price of raw materials declined amid increased concern about the health of some economies in Europe after Portuguese 10-year bond spreads widened by 30 basis points over German Bunds and the Spain fuelled concern about the size of its fiscal deficit by backing down on pension reform. The kiwi dollar has tumbled 2.6% since government data showed the unemployment rate surged to 7.3% in the December quarter, exceeding the market’s forecast of 6.8%. European Central Bank President Jean Claude Trichet allayed fears about Greece, saying he was satisfied with the direction of its plan to cut its deficit.  

“There was a spike in risk aversion involving European sovereign markets – everyone’s looking at Spain and Portugal now after Trichet said he was reasonably satisfied with Greece,” said Mike Jones, strategist at Bank of New Zealand. The falls in equity and commodity markets kept the New Zealand and Australian dollars under pressure as “people were pretty keen to sell on rallies in those currencies and go back into the safe havens of the U.S. dollar and yen.” 

The kiwi tumbled to 68.88 U.S. cents from 69.54 cents yesterday, and dropped to 61.32 yen from 63.11 yen. It declined to 63.88 on the trade-weighted index, or TWI, a measure of the currency against a basket of five currencies, from 64.32 yesterday, and rose to 79.42 Australian cents from 79.02 cents. It fell to 50.04 euro cents from 50.20 cents yesterday, and slipped to 43.69 pence from 43.79 pence.  Jones said the currency may trade between 68.30 U.S. cents and 69.90 cents today, though if it breaks through the bottom of the range, the next level of support is at 67.70 cents.  

“If Asian equities take the negative tone from offshore, we may see the kiwi weaken a bit more,” he said.  

U.S. non-farm payrolls data out today in America may show a gain in employment in the world’s largest economy, which should be supportive of the greenback, Jones said.  

The Bank of England and European Central Bank both reviewed their respective benchmark interest rates, and made no change.

ANZ National bank economists said it was worth noting this was the first time since the Bank of England introduced quantitative easing in March last year that it didn’t boost the size of its Asset Purchase Programme.

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