Dollar buoyed by gains on Wall St amid M&A activity

Tuesday 29th September 2009

The New Zealand dollar rose, buoyed by gains on Wall Street and equity markets in Europe amid merger and acquisition activity in the world’s largest economy stoked optimism.

The Dow Jones Industrial Average climbed 1.3% after Xerox Corp. announced it would takeover Affiliated Computer Services for US$6.4 billion in cash and stock, while Abbott Laboratories said it would buy the drugs unit of Solvay for 4.5 billion euros. The major US bourse has gained 5.1% this month in what is traditionally a weak time of year for equity markets, as investors remain optimistic the global economic recovery will underpin companies’ return to profitability.

“The kiwi’s hostage to what happens offshore – equity markets are a key barometer for what markets are thinking,” said Khoon Goh, senior markets economist at ANZ National Bank. “There was a bit of weakness (in the kiwi) because risk aversion came back and Asian equity markets fell sharply, but the Dow Jones spiked higher on M&A activity” and kept the currency afloat, he said.

The kiwi edged higher to 71.55 US cents from 71.47 cents yesterday, and was little changed at 65.25 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 65.20. It advanced to 64.18 yen from 63.90 yen yesterday, and increased to 48.96 euro cents from 48.85 cents.

Goh said the currency may trade between 71.43 US cents and 72.37 cents today, but will struggle to break through the top barrier. It made two attempts yesterday to climb above 72 cents but was quickly rejected by the markets, he said.

Reserve Bank of Australia Governor Glenn Stevens yesterday told policy makers fiscal and monetary support needs to be unwound during the “recovery phase” of the business cycle, and he would move to boost rates before they created imbalances in the economy.

Markets now expect the RBA to begin hiking rates on Melbourne Cup, the first Tuesday in November, and have priced in an increase of 33 basis points this year, according to ANZ National research.

Still, New Zealand’s central bank Governor Alan Bollard may not follow his trans-Tasman counterpart in hiking rates earlier than expected, as “the two economies are very different,” Goh said. “Even if the RBA go first, it doesn’t necessarily mean we should be following in their steps,” he said.

“The Australian economy didn’t enter recession and it’s gathering a lot more momentum than New Zealand’s.” The kiwi dollar slipped to 82.19 Australian cents from 82.63 cents yesterday.

The number of new building consents issued in August will be released by Statistics New Zealand this morning, and are expected to show a pick-up as the housing market underpins the economic recovery in New Zealand.

Businesswire.co.nz

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