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NZ dollar reaches 26-month high versus euro on Greek deficit

Friday 23rd April 2010

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The New Zealand dollar rose to a 26-month high against the euro after figures showed Greece’s fiscal deficit was worse than initially estimated last year, suggesting the nation may require greater help from its EU neighbours.

Eurostat released upward revisions to Greece’s debt position to 13.6% of gross domestic product, and prompted a downgrade of the debt-stricken nation’s sovereign rating by Moody’s Investor Services to A3. Greek 10-year sovereign bond spreads widened to a new record of nearly 580 basis points above German bunds, and Europe’s currency sank 0.5% to US$1.3291 per euro, as investors’ appetite for higher yields was sapped by the gloomy outlook. Central bank Governor Alan Bollard will keep the OCR at a record-low 2.5% next Thursday, though traders will be looking for any hint as to when he will begin tightening monetary policy.

“Further developments out of Greece showed their fiscal position is far worse than anyone thought,” said Khoon Goh, senior markets economist at ANZ New Zealand. “The euro got smashed and dragged the kiwi and Aussie with it,” he said, referring to the trans-Tasman currencies colloquially.

The kiwi inched down to 71.04 U.S. cents from 71.10 cents yesterday, and rose to 66.20 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 66.11. It gained to 66.46 yen from 66.22 yen yesterday, and dropped to 76.56 Australian cents from 76.72 cents. It gained to a 26-month high of 53.45 euro cents from 53.23 cents yesterday, and increased to 46.23 pence from 46.14 pence.

Goh said the currency may trade between 70.85 U.S. cents and 71.48 cents today, with all eyes looking offshore for direction.

“Markets are fairly comfortable with the kiwi in its current ranges,” he said. The currency probably won’t move on the March migration data when it’s released this morning, with “everyone squarely focused on next Thursday’s OCR review,” Goh said.

The market is looking for hints from Bollard as to when he will embark on tightening interest rates, and after last week’s softer inflation data, it has pared back its expectations for a hike in June. Investors are betting Bollard will boost rates by 159 basis points over the coming year, according to the Overnight Index Swap curve.  

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