Currency Focus: Uridashi, Eurokiwi demand may slow NZ recovery

Wednesday 24th June 2009

Sales of New Zealand dollar urisdashi and eurokiwi bonds in June outpaced redemptions for the first time in more than a year, suggesting renewed appetite for high-yields will underpin the kiwi heading into the biggest month of maturities in at least a decade.

The so-called Japanese housewives and Belgian dentists have regained their appetite for higher yields and are seeking out assets in trans-Tasman currencies amid rising optimism the global recession has passed its nadir.

Rabobank Nederland NV’s sold $419 million of uridashis this month, the largest such sale in 2009. A resilient kiwi dollar poses problems for a Reserve Bank determined to rebalance economic growth away from debt-fuelled consumer spending and into investment and the export sector.

The New Zealand dollar reached a record 81.70 US cents last March, when the official cash rate was peaking at 8.25%. The currency subsequently tumbled as the central bank slashed the OCR, reaching below 50 cents this March, but has surged as much as 34% since then, eroding returns for exporters.

“A worrying development is the renaissance in demand for high yield from Japanese investors,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney.

She argues that the influx has the potential, on balance, to drive down swap rates and give banks more room to reduce the cost of lending on property.

Sales of uridashis and eurokiwis have historically matched the housing cycle in New Zealand, according to RBC Capital. Added to that, resurgent net migration in New Zealand is likely to spur demand for properties, she said.

Central bank Governor Alan Bollard last week warned that there is “a risk people see the current stabilising of the housing market as a sign of another house price boom” giving them reason to resume borrowing to “spend up large” which could “jeopardise the next expansion.”

Bollard expects the economy will climb out of the recession, its worst in 30 years, in the fourth quarter of this year. July is seen as a key month for the uridashi and eurokiwi market, with some $4.6 billion worth of the debt securities set to mature. That’s four times the average monthly maturities and the potential outflow of funds was seen driving the kiwi dollar lower.

“The size of the maturity next month might show up in the currency markets,” said Imre Speizer, currency strategist at Westpac Banking Corp.

Still, investors in the bonds may roll their money into other kiwi-denominated assets, given the increased demand for higher yields, he said. Japanese investors face miserly yields at home.

Two-year government bonds yield just 0.35% while New Zealand debt of comparable maturity yields 3.87% and Australia’s is at 3.97%.

The gap between yields on Japanese government bonds and their counterparts Downunder has widened in the past four months. German two-year bunds are yielding 1.22%. Rabobank offered a coupon of 3.2% in its sale of urisdashis this month.

Danica Hampton, currency strategist at Bank of New Zealand, estimates that investors have rolled over about 26% of their funds in eurokiwi bonds and 40% of uridashi bonds in the past six months.

More sales may be looming. Toyota Motor Credit Corp. is planning to issue up to one trillion yen ($16.7 billion) of the debt over the next two years, with the Australia and New Zealand currencies likely to be major beneficiaries.

After Toyota Motor Credit’s last shelf registration, it sold $7.3 billion and A$5.6 billion worth of uridashi bonds.

The New Zealand dollar has gained as much as 40% versus the yen since reaching a 10-year low of 45 yen in early February, and recently traded at 60.67 yen.

The Australian dollar gained as much as 41% from a low in February and was recently at 75.52 yen. Bollard next reviews monetary policy on July 30.

Businesswire.co.nz

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