NZ dollar drops back as central bank moves attract skeptics

NZ dollar pares gains as central bank coordination attracts skeptics

By Paul McBeth

Dec. 1 (BusinessDesk) – The New Zealand dollar pared gains after surging 2 percent in New York trading amid fears a European bank’s inability to secure credit lines was behind the coordinated central bank effort to cut funding costs for lenders.

The kiwi fell to 77.80 US cents at 5pm from 77.91 cents at 8am, and was up from 76.26 cents yesterday. It rose as high as 78.07 cents, the highest level since Nov. 15.

Yesterday investors flocked to so-called risk-sensitive assets such as the trans-Tasman currencies after the US Federal Reserve, the European Central Bank and their counterparts in Canada, Britain, Japan and Switzerland jointly agreed to cut interest rates on dollar liquidity swap lines by 50 basis points in a bid to free up the availability of credit. That coordinated action sparked speculation the move was taken to protect a major European lender struggling to meet its liquidity needs, cooling the upbeat sentiment.

“The big rumour of the day is that one of the big European banks is in trouble and that’s why they made the move – it’s a negative connotation that they had to do that,” said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional. “Asian markets took it back and the kiwi was quite heavy in our time.”

Investors will continue to watch what goes on in Europe as policymakers prepare for a regional leaders’ summit on Dec. 9, where it’s expected they will unveil a plan to prevent creeping sovereign indebtedness from spreading to the major economies.

“The market’s waiting to see how Europe reacts, it doesn’t solve the fundamental problems,” Kelleher said.

The Financial Times reported the coordinated action as an admission that central bank credit lines offered in an earlier attempt to ease interbank liquidity had failed.

“The main reason for banks not using the swap lines is probably stigma. It’s the danger that somebody will find out and say: ‘Why are you going to the central bank, rather than the money markets, where you can borrow much more cheaply?’,” Walter Meier, a spokesperson for the Swiss National Bank, told the FT.

The weakest Chinese manufacturing data since February 2009 also weighed on investor confidence. The Purchasing Managers Index showed manufacturing shrank in the world’s second-biggest economy last month.

New Zealand’s terms of trade – the amount of imports that can be funded by a fixed quantity of exports – fell 0.7 percent in the September quarter, as export prices fell more sharply than import prices in the period when the currency was at a four-year high on a trade-weighted basis.

The kiwi rose to 57.85 euro cents from 57.25 cents yesterday, and advanced to 49.59 British pence from 48.9 pence. It climbed to 60.59 yen from 59.4 yesterday, and was little changed at 76.18 Australian cents from 76.12 yesterday.

The trade weighted index rose to 68.79 from 67.95.

(BusinessDesk)

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