NZ dollar falls below 67 cents; Europe debt fears linger, Fonterra forecast awaited

Tuesday 25th May 2010

The New Zealand dollar slipped below 67 US cents as concerns about Europe’s sovereign debt crisis continue to weigh on investor sentiment and as traders await Fonterra Cooperative Group formal review of its forecast pay-out to farmers for next season’s milk.

Concerns about the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) kept investors nervous after the Bank of Spain removed the managers of savings bank CajaSur, which makes up about 0.6% of the country’s financial system assets, and put the lender under a provisional administrator. Still, the extreme volatility of the past week has begun to subside with the Volatility Index, or VIX, commonly known as Wall Street’s ‘fear gauge’, falling 10% to 38.23. The kiwi dollar remained under pressure, though it might stave off a move lower if Fonterra’s board decides to announce a bigger forecast for next season after dairy prices bounced back to mid-2008 levels, and helped underpin New Zealand’s economic recovery.

“The panic has reduced slightly, but nervousness remains” about the state of Europe’s debt crisis and global financial markets, said Imre Speizer, markets strategist at Westpac Banking Corp. The kiwi is biased to moving lower, “but if there’s a boost in next season’s (Fonterra) pay-out it might hold in the current range.”

The kiwi fell to 66.92 US cents from 67.35 cents yesterday, and declined to 65.12 on the trade-weighted index of major trading partners’ currencies from 65.43. It dropped to 60.42 yen from 60.75 yen yesterday, and decreased to 80.97 Australian cents from 81.14 cents. It slid to 54.12 euro cents from 54.30 cents yesterday, and was down to 46.37 pence from 46.64 pence. Speizer said the currency may trade between 66.50 US cents and 68 cents today with the outlook “neutral to negative” on the kiwi.

The Reserve Bank of New Zealand’s survey of inflation expectations this afternoon is expected to give the market an idea of where banks and financial institutions see the two-year track of New Zealand’s consumer price index, though the latest dataset won’t include the stimulatory effects of the budget’s tax cuts and hikes on GST.

In its March monetary policy statement, the RBNZ forecast annual CPI will rise to 2.8% by the end of next year.

The pound was supported by traders in the London and New York sessions after British Chancellor of the Exchequer George Osbourne announced 6.25 billion pounds worth of cuts to government spending, and promised more to come in the June emergency budget.

Businesswire.co.nz

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