Dollar extends loss as Bollard stands ground on interest rates

Thursday 29th October 2009

The New Zealand dollar extended its losses from the New York session after central bank Governor Alan Bollard stood his ground on interest rates, saying he expects to keep the Official Cash Rate at a record-low level until the second half of next year.

The kiwi sank 0.9% immediately after the Reserve Bank kept the OCR at 2.5%. Bollard said there’s “no urgency to begin withdrawing monetary policy stimulus” and that the strong currency “has limited the scope for exports to contribute to the recovery and reinforces a bias towards domestic expenditure”.

The central bank’s stance reinforced investors’ bias against the kiwi after growing concerns about the strength of the global recovery saw an exit from higher-yielding, or riskier, assets. The Chicago Options Exchange Board’s Volatility Index, a measure of the price of insuring puts on the Standard & Poor’s 500 which is used to gauge investors’ risk appetite, climbed 12% to 27.91.

“The markets had priced in a full rate hike by January, but Bollard obviously doesn’t agree with that – it looks like he thinks he has room to wait until things are okay out there,” said Philip Borkin, economist at ANZ National Bank.

“There are concerns about the extent of recovery priced in global markets, which are showing up in consumer confidence, and this has seen investors pull back as people run for the exit.”

The kiwi slumped to 72.02 US cents from 72.74 cents immediately before the OCR review and traded at 73.63 cents yesterday in New York.

It fell to 65.25 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 66.35 yesterday, and declined to 65.48 yen from 67.25 yen. It dropped to 80.44 Australian cents from 81.11 cents yesterday and decreased to 49.07 euro cents from 49.99 cents. It sank to 44.07 pence from 44.99 pence yesterday.

Borkin said the currency broke through its support barrier after the RBNZ announcement and will probably follow Asian equity markets today.

Equity markets in the US extended their losses overnight as the number of new home sales in America fell 3.6% last month, well short of the 2.6% gain forecast by analysts.

Investors were spooked by news US financial services firm GMAC is trying to tap the US Treasury for between US$2.8 billion and US$5.6 billion on top of the $12.5 billion it’s already received, while the delay to Ireland’s “bad bank” plan renewed concerns about Europe’s banking sector.

Norway’s Norges Bank boosted its benchmark interest rate 25 basis points to 1.5%, becoming the first central bank in Europe to tighten monetary policy since the financial crisis last year. The kiwi fell to 4.13 kroner from 4.17 kroner yesterday.

Businesswire.co.nz

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