10 May 2013

NZ dollar rebounds

7:41 am on 10 May 2013

The New Zealand dollar on Thursday recovered all the ground it lost on Wednesday and more after the unemployment rate fell by more than expected.

The kiwi hit a high of 84.70 US cents soon after the labour data was published.

On Wednesday, the currency had dropped as low as 83.60 US cents after the Reserve Bank's disclosed that it had intervened in the currency market in the past month.

Bancorp Treasury Services adviser Peter Cavanaugh said every aspect of the figures were much stronger than the market had expected, but the impact on the currency creates a dilemma for the Reserve Bank.

He said the New Zealand dollar fell following the Reserve Bank's comments because the market interpreted that as meaning that the Reserve Bank will do something about the high currency.

Mr Cavanaugh said the announcement also followed the announcement that the Reserve Bank of Australia had cut its cash rate.

"All of that sentiment was very quickly reversed today with very upbeat employment data in New Zealand and then in Australia, data which showed that both the Australian and New Zealand economies are tracking along quite well and don't deserve to be reflected in a weaker currency."

Mr Cavanaugh said the Reserve Bank's view is that an overly strong currency is harming the tradable sector and will eventually have an impact on New Zealand's economic growth.

He said that although the Reserve Bank is worried about inflation going below its range, as it is now, it would also worry if inflation went above that band, for example if house prices suddenly skyrocketed causing another spending and borrowing binge.

Mr Cavanaugh said the huge swings in the currency are a nightmare for his exporting clients to deal with.

He said it's impossible for firms to put in place sensible risk management strategies or hedges when the underlying rate that they have to deal with is so volatile.