China's sudden rate hike sinks Kiwi dollar

Wednesday 20th October 2010

The New Zealand dollar sank 1.1% after an unexpected rate hike by the People's Bank of China took markets by surprise and sapped investors' appetite for higher-yielding assets.

So-called risk-sensitive assets such equities and commodity currencies fell after the PBOC raised its benchmark one-year lending rate a quarter-point to 5.56%, the first hike since 2007, spooking markets amid fears the China will have to clamp down growth to stop its economy from overheating.

That comes before a dump of Chinese data tomorrow, including third quarter GDP, CPI, retail sales and industrial production.

A 2.5% fall in the trade-weighted price of dairy products on Fonterra's online globalDairyTrade platform added to the kiwi's weakness.

"The rate hike by China took everybody by surprise and saw risk off the table," said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

"It's quite clear tightening conditions in China will act to slow growth and impact on demand for commodities, with currencies hit hard, the Aussie especially."

The kiwi sank to 74.52 US cents from 75.35 cents yesterday, and dropped to 66.66 on the trade-weighted index of major partners' currencies from 66.91.

It declined to 60.69 yen from 61.37 yen yesterday, and rose to 76.85 Australian cents from 76.40 cents.

It was little changed at 54.23 euro cents from 54.20 cents yesterday, and fell to 47.43 pence from 47.54 pence.

Goh said the currency may trade between 74.45 US cents and 75.15 cents today, and will wait on tomorrow's Chinese data for its next cue.

Though it's too early to call a change in the upward trend for the trans-Tasman currencies, strong inflation in China could damp the country's growth prospects, and weigh on the fortunes of Australia and New Zealand, he said.

The Chinese news took the focus off the question of whether America's Federal Reserve will embark on a second round of asset purchases, which has kept the greenback weak in recent weeks.

Several more Fed officials lent their support for more quantitative easing. Atlanta Fed President Dennis Lockhart said QEII would have to be big enough to make a difference, which in his view would be about US$100 billion a month.

Stocks on Wall Street sank amid disappointing third-quarter earnings from Apple Inc. and IBM, while concerns about US foreclosures are weighing on America's financial sector.

Businesswire.co.nz

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