Dollar gains as government aid lifts risk appetite

By Paul McBeth

Wednesday 4th February 2009

The New Zealand dollar rose as fiscal stimulus packages in Japan, China and Australia helped restore investors' risk appetite. The kiwi may give up its gains with figures tomorrow expected to show a surging jobless rate.

China boosted its fiscal stimulus by US$19 billion, while the Bank of Japan announced it would take on financial institution shares worth one trillion yen to shore up their capital.

The Australian government is injecting an extra A$42 billion of fiscal spending to protect its economy from recession, while the Reserve Bank of Australian slashed a further 100 basis points from its benchmark rate to a 45-year-low of 3.25%.

While this stimulus encouraged investors to seek higher-yielding, or riskier assets such as those priced in New Zealand's currency, the kiwi will likely fall with the Household Labour Force Survey tomorrow.

"Labour markets are moving quite sharply" and an unemployment rate of 5% can't be ruled out, said Philip Borkin, economist at ANZ National Bank. "Tomorrow's data is the main theme of the day," with rising jobless rates likely to drag down sentiment for the kiwi, he said.

The kiwi jumped up to 51.35 U.S. cents from 50.37 cents yesterday, and rose to 45.80 yen from 45.09 yen. It fell to 78.59 Australian cents from 78.95 cents yesterday, and increased to 39.46 euro cents from 39.22 cents.

Borkin said the currency may trade between 50.75 U.S. cents and 51.70 cents today as investors await tomorrow's data release. "Today's rally doesn't look like it has got legs and we could see it pushed below 50 U.S. cents tomorrow," he said.

Adding further pressure to the New Zealand dollar was a fall in the price of milk powder on Fonterra Group Cooperative's online auction. The average price of milk powder slumped a further 8.2% to US$1851 per metric ton.

Prices have plummeted 58% since the world's largest exporter of dairy products introduced the controversial auctions last July. Dairy products accounted for 22% of New Zealand's $42.5 billion of exports in the 12 months ended October 31.

As a producer nation, New Zealand's currency benefits from strong prices for raw materials, adding value to the export market and increasing demand for the dollar. The ANZ January commodity price index will be released today, giving investors and producers an indication of where prices are heading.

(Businesswire.co.nz)

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