NZ dollar climbs over 72 US cts as carry trade shifts back to Japan

Thursday 31st December 2009

The New Zealand dollar climbed back over 72 U.S. cents amid rumours the carry trade is shifting out of the greenback and back into the yen.

The kiwi dollar has surged 24% this year after investors eschewed the U.S. dollar around March on the prospect of a softer global recession and faster return to growth. A near-zero interest rate policies by the Federal Reserve encouraged traders to use the greenback to fund the so-called carry trade, where investors borrow cheap money to invest in higher yielding assets, though the prospect of an early rate hike by the Fed may deter this from continuing.

“Against all of the crosses, the kiwi has had a strong night, though liquidity is at a premium, and this has exacerbated the moves,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “There’s talk that people are moving back into the yen rather than U.S. dollar to fund their kiwi dollars as most of the moves have been Japan-based.”

The kiwi climbed to 72.13 U.S. cents from 71.70 cents yesterday and gained to 66.61 yen from 66.02 yen. It rose to 65.97 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 65.62 yesterday, and increased to 80.59 Australian cents from 80.30. It advanced to 50.29 euro cents from 49.95 cents yesterday and slipped to 44.85 pence from 45.14 pence.

Kelleher said the currency may trade between 72 U.S. cents and 72.30 cents today with most action occurring during the London and New York sessions, and has been surprised by the amount of activity over the Christmas period.

The New Zealand dollar will end the year on a high having surged from its sub-50 U.S. cents low in March as investors looked for higher yields amid a brighter outlook for the global economy, and will end the quarter relatively flat.

“The kiwi’s only four cents off its high and it’s had a very strong year,” Kelleher said. Still, “the strong U.S dollar is more likely than not” in 2010 though the market won’t get a good insight into how traders view things until the first week of next year, he said.

In the past three months, investors have started betting the Fed will be forced to boost rates earlier than expected and have unwound their short positions in the greenback, in which they sell their U.S. dollar holdings in the expectation of being able to buy the currency for a cheaper price.

The Dollar Index, a measure of the greenback against a basket of currencies, has surged 4% to 77.81 in December, though it’s still down 4.1% on the year.

Businesswire.co.nz

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