NZ dollar falls as Wall St slips on concern about bond yields

Thursday 28th May 2009

The New Zealand dollar fell below 62 U.S. cents as concerns about a flood of new U.S. Treasuries driving up U.S. interest rates, weighed on Wall Street and sapped demand for high-yielding, or riskier, assets.

The sale of US$35 billion of U.S. government 5-year notes yesterday which pushed up ten-year yields raised concerns in equity markets that interest rates may rise despite moves by the Federal Reserve to keep them low. The fall on Wall Street dragged down demand for risk currencies like the kiwi, as the gap between 10-year New Zealand government bonds and 10-year U.S. Treasuries narrowed to 220 basis points from 260 basis points at the start of the year. Investors will be watching the New Zealand government’s budget announcement today, which is expected to determine whether the country’s AA+ foreign currency rating will be downgraded by Standard & Poor’s.

“Equity markets noticed the aversion to U.S. debt first” and that subsequently flowed into the currency markets, said Imre Speizer, currency strategist at Westpac Banking Corp. “The budget is the talk of the world for financial analysts” who will be figuring out the probability of a downgrade to the nation’s credit rating, he said.

The kiwi sank to 61.38 U.S. cents from 62.05 cents yesterday, and dropped to 58.48 yen from 59.13 yen. It gained to 79.11 Australian cents from 78.92 cents yesterday, and slipped to 44.37 euro cents from 44.46 cents.

Speizer said the currency may trade between 61 U.S. cents and 62.50 cents today. The Standard & Poor’s announcement on the country’s rating will be the main driver once the budget is unveiled, and the currency will take its cue from the rating agency’s decision.

He predicts S&P will keep New Zealand’s rating at AA+ with a negative outlook, which would probably see a “slight rally” in the currency.

If the negative watch is removed, it could jump a cent higher, but if the rating is downgraded it may tumble a few cents, he said.

Danica Hampton, currency strategist at Bank of New Zealand, expects S&P will “refrain from downgrading NZ’s sovereign rating over the near term”, but doesn’t rule out Moody’s or Fitch revising their rating of the country’s credit down.

Standard & Poor’s put New Zealand’s foreign currency rating on a negative outlook in January after the current account deficit ballooned to 8.9% of gross domestic product in the three months to Dec. 31.

Prime Minister John Key and Finance Minister Bill English have repeatedly said today’s budget will allay the agency’s concerns about the country’s debt outlook, which could cost the nation as much as $600 million per year, according to the Treasury.

Businesswire.co.nz

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