Dollar gains as Goldman outlook stokes risk appetite, Wall St rallies

Tuesday 14th July 2009

The New Zealand dollar gained as US stocks rallied after a prominent US analyst upgraded her outlook for Goldman Sachs Group, raising the prospect of better-than-expected corporate earnings in the world’s largest economy and renewing investors’ interest in higher yields.

Meredith Whitney, founder of Meredith Whitney Advisory Group LLC, gave Goldman the only ‘buy’ rating of the eight companies she follows, saying the investment bank will “surprise big on the upside.”

Her comments come after Bank of America-Merrill Lynch analysts predicted strong second-quarter earnings from Goldman after record trading revenues were reported in the first three months of the year.

Any positive surprises in US corporate earnings will boost appetites for higher-yields and support riskier currencies like the kiwi. The Chicago Options Board Exchange’s Volatility Index, or VIX, which shows expectations of volatility on the Standard & Poor’s 500 index, tumbled 11% to 26.31. The S&P 500 advanced 2.5%.

“The rally in equities saw the kiwi find itself dragged higher” as investors sought out higher-yields, said Khoon Goh, senior markets economist at ANZ National Bank. Wall Street’s “rally was on the back of hope, more than anything else,” and the focus on earnings will switch to non-financials which will likely feel the brunt this quarter, he said.

The kiwi jumped to 63.26 US cents from 62.02 cents yesterday, and rose to 59.85 on the trade-weighted index, or TWI, a measure of the currency versus the greenback, pound, yen, euro and Australian dollar, from 58.88. It surged to 58.74 yen from 57.02 yen yesterday, and advanced to 45.24 euro cents from 44.46 cents. It gained to 80.71 Australian cents from 80.33 cents yesterday.

The kiwi extended its gain after Reserve Bank Governor Alan Bollard said a recovery in the domestic economy "is now on the horizon." The currency "has not shown particularly convincing signs of weakness," which would be needed to ensure an export-led recovery, he told a business audience in the Hawke's Bay.

Goh said the currency may trade between 62.75 US cents and 63.35 cents today as it follows movements in equity markets. The major focus this week is the corporate earnings season, and any surprises that influence stock markets will flow into currency markets, he said.

“There’s still a lot of uncertainty about the quality of the announcements, so people will be looking for the guidance statements,” he said.

Major American banks Goldman Sachs, JPMorgan, Citibank and Bank of America will announce their second-quarter results this week. Companies on the S&P 500 are expected to post an average 35% decline in second quarter earnings, and a 21% drop in the third, according to Bloomberg.

The yen may come under pressure in the coming month after Prime Minister Taro Aso dissolved Parliament yesterday and called a general election for August 30. The Liberal Democratic Party has governed the world’s second-largest economy for the better part of 50 years, and any political uncertainty over its future should drag the currency lower, Goh said.

Businesswire.co.nz

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