KEY POINTS:
New Zealand currency and stock markets took their cue from the United States after the Federal Reserve's decision to cut rates by a further 50 basis points.
After five rate cuts since last September, the Fed funds rate is now down to 3 per cent. New Zealand's official cash rate is 8.25 per cent.
BNZ currency strategist Danica Hampton said in an environment of uncertainty around how a likely US recession will weigh on global growth, currency markets have been looking to equity markets as a barometer of investor sentiment.
"After the announcement we saw US equities climb sharply and so that positive stock market reaction saw the kiwi climb," Hampton said.
The strong US stock market rally pushed the kiwi up by about 1c to US79.20c.
"The reaction was shortlived. It was kind of a knee-jerk bounce in US stock markets and as the session wore on and equity investors started to digest the data they had through the night, we saw US equity markets actually retreat and they ended up finishing the session in negative territory," she said.
Media reports in the last hour of the US trading session that bond insurers Ambac Financial Group and MBIA were facing imminent credit rating downgrades played a part in ending the US sharemarket's earlier rally.
The Dow Jones industrial average dropped 0.3 per cent and the Standard & Poor's 500 Index finished down 0.48 per cent.
Ambac and MBIA each finished down more than 10 per cent, which contributed to financial shares ending among the day's worst performers.
Consequently the kiwi slipped from the US79.20c high to US77.55c as the US equities slumped, before recovering to close near its opening on US78.08c.
Hampton said with further economic data due out of the US it will be a volatile week for the currency as investors seek to gain a clearer picture of how the US economy is faring and what that means for global growth.
"So in the meantime we'll just be trading off blips up and down on the S&P 500 or the Asian equity markets just as we wait for that data."
The cut in the Fed rate now sees the differential with New Zealand's official cash rate at 525 basis points, suggesting the so-called carry-trade, where investors borrow in a low interest rate regime and invest in a high yielding one, is likely to intensify.
Despite New Zealand's interest rate advantage over the Fed increasing to its widest in almost 15 years, Hampton does not see a strong likelihood of carry trades pushing the kiwi higher. She said while carry trades were a feature of currency movement last year, it was a function of strong global growth and appetite for risk.
"The environment's changed. Ever since the credit crisis, credit now costs more and people are more reluctant to lend," said Hampton. "All of those people that were borrowing money to invest in the carry trade now have got a higher hurdle to cross before they can get into the positions. So undoubtedly we'll still see them but probably not to the same extent we saw in 2007."
The New Zealand sharemarket yesterday followed the US lead with the NZX-50 ending down just 0.71 per cent at 3670.6 points.
First NZ Capital client adviser Barry Lindsay said the US rally then decline would have "surprised and disappointed" investors, setting the scene for yesterday's trading in New Zealand.
Lindsay described the behaviour of the Australian market as perplexing, showing much more volatility than normal.
The S&P/ASX 200 shed 170 points after opening and traded mainly in negative territory before regaining ground to end up 31.6 points at 5650.3.
- Additional reporting: agencies
Fallout
* The Federal Reserve cut its key interest rate by 0.5 per cent to 3 per cent and signalled more rate cuts were likely.
* US equity markets responded positively before falling on speculation of an imminent credit rating downgrade to bond insurers.
* The New Zealand dollar jumped US1c to US79.20c after the Fed announcement before closing near its opening on US78.08c.
* The NZX-50 closed down 0.72 per cent at 3670.6.
