By BRIAN FALLOW
The New Zealand dollar remained unloved yesterday, even though the market welcomed the surprise 50 basis-point cut in the official cash rate.
"The Reserve Bank's cut puts the bank in a better light, but does not change global risk aversion," said Westpac currency strategist Johnathan Bayley.
The New Zealand and Australian dollars have fallen 5 per cent against the United States dollar since the attacks on the World Trade Center and the Pentagon last Tuesday, even though the US dollar has lost ground against the euro and the yen.
Risk averse investors have been pulling funds out of peripheral markets such as New Zealand in favour of traditional safe havens such as US Government debt and Swiss francs.
In addition there has been an urge to repatriate funds. "Historically, Japanese have been quick and significant repatriaters in times of crisis," Mr Bayley said. "What we have seen over the last few days suggests that repatriation flows are stronger than safe-haven flows at present."
Deutsche Bank chief economist Ulf Schoefisch said that in uncertain times international investors preferred the comfort of familiar and deep markets. "Small markets are just tricky," he said. "They are more illiquid. They are far away and you don't understand everything that's going on. And in these volatile times you can get hurt."
Salomon Smith Barney/Citibank economist Annette Beacher said: "It appears the foreign exchange markets are rewarding currencies of countries with current account surpluses, hence the strength in the yen we have seen in recent days despite Japan being in a worse economic situation than practically any other OECD country."
Fundamentally New Zealand and Australia were in pretty good shape, Ms Beacher said, "and those seeking yields would find plenty of value in the aussie and kiwi spreads. But at this stage it just appears investors are on the sidelines."
Mr Bayley said those who thought the kiwi's drop to 40.86USc overnight on Tuesday marked the bottom were operating under a false sense of security.
"Speculative selling has abated for the time being, there is commercial interest to buy the New Zealand dollar on weakness, and the Reserve Bank's 50 basis-point easing does put the bank in a better light," he said.
"This is reflected in the currency's current consolidation above 41USc.
"However, this situation is unlikely to last for long. The rate cut simply moves the bank into line with the recent monetary responses of other major central banks and will do nothing to change the mood of risk aversion."
Beyond the present consolidation, there was a strong risk of a further slide towards 40USc, Mr Bayley said. The kiwi closed yesterday at 41.1USc.
Ninety-day bank bill futures rallied after yesterday's rate cut. The market is pricing in a one-in-five chance of a further rate cut before the end of the year.
"It is dangerous to assume [the Reserve Bank] will follow this up," Mr Schoefisch said. "Only if the situation deteriorates markedly on the domestic front will they decide to go in November."
If the additional insurance represented by the latest cut proved to be unnecessary no one would blame the bank if it took it back, perhaps in the second quarter next year, he said.
Westpact Trust chief economist Adrian Orr, who has argued for some time that policy was too tight in light of the synchronised global downturn, welcomed the move and is calling for another 25 basis points in November.
"The global easing we have seen over recent days will undoubtedly raise the chances of a V-shaped world recovery, albeit not until at least the second half of 2002," he said.
Cut fails to lift kiwi as investors seek safe havens
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