NZ dollar drops below 78 US cts on Italian debt risks

NZ dollar drops below 78 US cents as Italian debt risk sends shivers up investors’ spines

By Paul McBeth

Nov. 10 (BusinessDesk) – The New Zealand dollar extended its decline through local trading after it shed more than 1 US cent in the New York and London sessions as concerns grow about Italy’s ability to repay its government debt.

The kiwi fell to 77.80 US cents at 5pm from 78.22 cents at 8am, down from 79.48 cents yesterday.

Investors fled from so-called risk-sensitive assets after the yield on 10-year Italian government bonds rose to 7.5 percent yesterday, indicating the market doesn’t think the proposed cost-cutting measures outgoing Prime Minister Silvio Berlusconi intends to pass next week will keep Italy afloat. Traders will be watching the Italian bond auction on Thursday in Europe to see whether the heavily indebted nation can attract enough buyers to meet its upcoming debt repayments.

“Everyone had seven percent as the line in the sand when Italian debt would start to become too expensive,” said Chris Tennent-Brown, FX strategist at Commonwealth Bank of Australia in Sydney. “When volatility spikes higher, it reduces the appeal of owning currencies like ours.”

The threat of Italy’s debt problems spreading to the rest of Europe is weighing on the prospects for the global economy next year, and Tennent-Brown said forecasts for growth may have to be wound back.

That would eventually seep into commodity prices, which would slow New Zealand’s economic recovery and trim the appeal of the kiwi dollar.

Tennent-Brown said CBA’s forecast of the kiwi hitting 82 US cents by the end of the year was looking unlikely at present, but that could turn around if sentiment shifts.

Reserve Bank deputy governor Grant Spencer today told a media briefing in Wellington he wouldn’t expect the kiwi to show much strength in the near term amid the current turmoil in financial markets. The central bank’s financial stability report said the currency was at risk of a sharp depreciation given the increased cost of insuring against it becoming weaker.

Local news added to the downbeat tone, with the Business NZ-BNZ performance of manufacturing index showing the sector shrank last month, to its weakest level since June 2009. A consumer confidence survey showed households weren’t keen to ramp up spending and were more pessimistic about their current financial situation, while the Treasury’s financial statements for the government showed a smaller-than-forecast tax take.

The kiwi slipped to 76.61 Australian cents from 76.77 cents yesterday, and fell to 60.44 yen from 61.64 yen yesterday. It was little changed at 57.43 euro cents from 57.47 cents, and declined to 48.83 British pence from 49.37 pence yesterday.

The trade-weighted index declined to 68.73 from 69.42.

(BusinessDesk)

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