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Home / Business / Companies

Kiwi risks in maturing bonds take back seat to US dramas

By Adam Bennett
20 Aug, 2007 05:00 PM3 mins to read

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KEY POINTS:

The downside risk to the New Zealand dollar from $2.5 billion worth of overseas retail bonds that matured yesterday took a back seat to the ongoing US credit market problems.

While the kiwi dollar was sold off against the yen and rose against the greenback, the moves were
fairly restrained compared with its recent gyrations driven by turmoil in global equity and credit markets.

Having opened at US67.79c, the kiwi ended yesterday's local session at US69.10c. It had gained more than 2.5c against the US dollar since Friday, when the US Federal Reserve bank temporarily cut its overnight discount rate, sparking prospects it would follow that up with a cut to its official rate next month.

"The uridashi story is quite peripheral at the moment," said Royal Bank of Canada currency strategist Sue Trinh.

"The markets continue to be dominated by the ongoing finance market turmoil.

"The US Fed did achieve some restoration of confidence in markets by cutting the discount rate by 50 basis points and the market is still pricing in a very high chance of a proper Fed rate cut come September as well.

"That's given carry trades like the kiwi and aussie a boost, but the jury's still out on that one."

The nervousness in US and international markets that the Fed acted to address has seen carry trades - where low-yielding currencies like the yen are borrowed to invest in high-yielding ones like the kiwi dollar - unwound as investors seek to reduce exposure to risk.

However, Trinh believed the sub-prime-related issues were essentially a US problem and should ultimately weigh on that country's currency.

"Once we move past this phase, the US dollar will come under renewed pressure and the kiwi will be boosted.

"We are still looking for a move towards that US79c area by the end of the year."

Meanwhile, about $1.5 billion in new uridashi and eurokiwi issues have already been announced officially this month.

Westpac currency strategist Michael Gordon said about $2.9 billion of the $3.65 billion in maturities this month had been reinvested so far, leaving a relatively small shortfall that was unlikely to be a material drag on the kiwi dollar.

URIDASHIS AND EUROKIWIS

* New Zealand dollar-denominated bonds issued to overseas retail investors.

* $3.65 billion of the bonds mature this month, including $2.5 billion worth yesterday.

* The heavy maturity has led to concerns of a big sell-off of the dollar.

* $1.5 billion in new issues has already been announced this month and as much as $2.9 billion of the maturing bonds may have already been reinvested.

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