NZ dollar gains on US manufacturing, China rally

NZ dollar gains as US manufacturing, China rally revives risk appetite

By Jonathan Underhill

August 21 – The New Zealand dollar gained, joining a rally in higher-yielding currencies, as stronger U.S. manufacturing data and a rebound in Chinese stocks helped revive investors’ appetite for risk.

The Standard & Poor’s 500 gained 1.1% after the Federal Reserve Bank of Philadelphia’s general economic index rose to 4.2% in August from minus 7.5 in July. Separately, the Conference Board’s leading economic indicators, which indicate the pace of the economy out six months, rose 0.6% in July. American International Group shares soared 21%, leading the S&P 500 higher, after the insurer said it expects to repay U.S. government aid. In China, seen as a key driver of world economic growth, the Shanghai Composite Index jumped 4.5% yesterday, edging back from a bear market.

“There are still undeniable signs that the world is a better place than it was six months ago,” said Philip Borkin, economist at ANZ National Bank. Positive signs from China help support commodity prices and the currencies of producers, he said. “People are looking at whether it (China) is a driver of growth going forward.”

The kiwi dollar rose to 67.71 U.S. cents in Wellington from 67.47 cents in late trading yesterday. The currency strengthened to 63.78 yen from 63.63 yen and climbed to 81.37 Australian cents from 81.07 cents. The kiwi dollar traded at 47.48 euro cents from 47.42.

Borkin predicts the New Zealand dollar will trade in a “tight” range of 67.15 U.S. cents and 67.85 cents today.

The patterns of currency trading may now be in a process of change, he said. Through the depths of global recession, traders have tended to sell the greenback in favour of higher yielding currencies at any sign on improvement or rally in stocks.

Now, more investors may be willing to buy U.S. dollars on signs of a pick-up in the U.S. economy, he said. “Sentiment is very fickle,” he said. “The trend following behavior where everyone is looking at equities and risk appetite is potentially coming to an end.”

Treasury Secretary Timothy Geithner told an audience in Ohio that U.S. economic recovery is still in its early stages though there are signs of stabilization.

“We are starting to see signs of stability, and these signs mark the first steps to recovery,” Geithner said.

To be sure, stock markets may struggle to extend their gains.

“After rallying about 50% from the March lows, many offshore equity markets still look stretched relative to valuations,” said Danica Hampton, currency strategist at Bank of New Zealand. "In the near-term, given the uncertainty about the global recovery, expect the fortunes of NZD/USD to remain closely tied to the performance of global equities.”

(BusinessWire)

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