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NZ dollar rises as G7 leaders' meeting, RBA review loom

Tuesday 5th June 2012

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The New Zealand dollar rose after the Group of Seven leaders agreed to discuss Europe's debt crisis, easing concern that more banks will need rescuing in the face of the region's debt crisis.

The New Zealand dollar rose to 75.70 US cents at 8am from 75.13 cents in late Asian trading yesterday, when the local market was closed for the Queen's Birthday holiday. The trade weighted index increased to 69.18.

G7 leaders are scheduled to hold a conference call on Tuesday to discuss Europe's debt crisis, with Spain likely to be top of the agenda. Euro leaders have also agreed to discuss closer banking cooperation after the European Commission called for a "banking union" to integrate tighter supervision of lenders and create a pool of EU funds to clean up banks with cross-border exposure.

"There is basically a growing call in the wider European Union to use the European Stability Fund for banks," said Stuart Ive, currency strategist at HiFX. "There is a general feeling that markets have been pretty heavily sold and the situation in Europe isn't changing until we get some plan of how they well deal with Spain."

"The kiwi reached 74.50 US cents on Friday and it has bounced back twice from that level now - we are pretty well supported," he said.

The talks come as Bankia, Spain's fourth-biggest bank, seeks 19 billion euros of state funding, more than the 15 billion euro government estimate to shore up the entire sector, after it increased its provisioning for bad debts last week.

The kiwi traded at 77.79 Australian cents from 77.84 cents yesterday as the Reserve Bank of Australia prepares to review its target cash rate this afternoon. In May the RBA cut rates by 50 basis points to 3.75 percent, closing the gap with New Zealand's official cash rate at 2.50 percent.

"The kiwi will be led by the Australian dollar today - if the RBA cuts interest rates by 25 basis points the market will be calm - it's what they're expecting," Ive said. "If we saw an unchanged rate I think that will take the interest rate market off balance and our currency and the Aussie will rally quickly."

"If Australia went for a 50 basis point cut we would see a quick sell off in the Aussie and the kiwi will get towed along with it," he said.

In New Zealand, the Treasury's monthly economic indicators for May will be released today, followed by the Government financial statements for 10 months ended April 30 tomorrow.

The New Zealand dollar was little changed at 60.57 euro cents. It increased to 49.17 British pence from 48.88 pence and climbed to 59.3 yen from 58.71 yen.

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