NZ dollar holds ground; all eyes on Italian bonds overnight

New Zealand dollar. Photo / NZ Herald

The New Zealand dollar traded steadily after an overnight selloff triggered by concerns over the European Central Bank's ballooning balance sheet.

The kiwi's direction from here may be driven by Italy's sale of bonds today and the end of US corporate year-end hedging.

The New Zealand dollar traded at 76.88 US cents at 5pm in Wellington, from 76.92 US cents this morning and from 77.42 cents in late trading yesterday. The euro last traded at US$1.2925 and 100.53 yen, near one and 10-year lows respectively.

Italian 10-year bonds closed at 7.012 percent yesterday and some economists say a rate above 7 percent isn't sustainable.

Italy sold six-month paper yesterday in a well-supported auction but the appetite for longer-dated debt is in question. It will offer as much as 8.5 billion euros of bonds maturing in 2014, 2018, 2021 and 2022.

"We know the ECB balance sheet is expanding, that wasn't much of a surprise,'' said Chris Weston, markets strategist at IG Markets. "But it is probably a reminder of the bleak outlook for European growth.''

The ECB flooded the region's banking system with money and lenders put more cash on deposit in the ECB itself. There's some expectation the banks will use the cash, because they're "losing 75 basis points a day'' on an overnight basis at the moment, according to Weston.

A bad auction in Italy, where the nation was forced to pay a high coupon, may drive down growth-linked currencies like the kiwi and Australian dollars, with movements amplified by the low market liquidity in the holiday season. A well-bid auction could be the wind beneath the currencies' wings.

Weston said the euro's decline has been exaggerated by what is effectively the last day of the year for US corporate to hedge into the year-end with a two-day settlement.

The kiwi dollar traded at 59.78 yen, down from 59.93 this morning and from 60.23 yesterday. The kiwi was at 76.17 Australian cents, little changed from 76.13 cents at the start of the day and 76.22 cents yesterday.

It traded at 49.77 British pence from 49.73 pence earlier and from 49.44 pence yesterday.

The New Zealand dollar was at 59.48 euro cents from 59.40 cents this morning and from 59.23 cents yesterday.

The trade-weighted index was little changed at 69 from 69.11 yesterday.