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NZ dollar falls to 80 U.S. cents as Fed delivers the 'twist', local GDP looms

Thursday 22nd September 2011

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The New Zealand dollar dropped more than 2 U.S cents ahead of today's second quarter growth figures after the U.S. Federal Reserve delivered on its promise to lower long term yields through 'Operation Twist', dashing hopes in the market that the central bank would announce further stimulus.

The New Zealand dollar recently traded at 80 U.S. cents, down from 82.27 cents yesterday, and dropped to 70.97 on the trade-weighted index of major trading partners' currencies from 72.11 previously.

U.S. equities tumbled in the wake of the Federal Open Market Committee's decision to sell its short term government bond holdings in order to buy longer term securities, with the Standard & Poor's 500 Index closing 2.5% lower at 1,171.50. Operation Twist, aimed lowering business and home borrowing costs, appeared to have its intended effect with yields on 30-year U.S. Treasury bills falling faster than their 10-year counterparts.

"The market was expecting the Fed to engage in Operation Twist, and they delivered on what was expected and not a whole lot more, so clearly markets have taken it as disappointment," said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

Currency markets across the board also came under pressure as the U.S. dollar continued to track upwards as investors fled for the relative safety of the greenback.

"The Swiss franc has been taken out, the Japanese yen has the threat of intervention hanging over it, so the U.S. dollar is the only bastion of liquidity and safe haven status left, and we are seeing that flow through," said Goh.

The offshore volatility is likely to mute the impact of second local growth figures for the second quarter might have on the currency. That data, which is released mid-morning, is expected to show the New Zealand economy grew at a pace of 0.5% in the three months to June 30.

"GDP, if it comes in as expected, will still be taken as a positive as the market has been treating the number with downside risk," said Goh.

On the crosses, the kiwi recently traded at 79.50 Australian cents, down from 80.17 cents yesterday, and fell to 61.63 Japanese yen from 62.80 yen previously. It dropped to 58.90 euro cents from 60.17 cents yesterday, and fell to 51.65 pence from 52.39 pence previously.

Goh said the kiwi may trade between a range of 80 U.S. cents and 81.30 cents, with the bias towards the lower end support level.


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