KEY POINTS:
The New Zealand dollar strengthened today as investors were lured back into carry trades on the back of a rash of corporate merger news.
Carry trades are dealings that involve borrowing yen or Swiss francs at low interest rates to invest in assets and regions offering higher returns, such as the NZ dollar, and often higher risk.
In recent weeks investors have shied from carry trades, which are often financed with yen, after equity markets got the wobbles in the wake of a 9 percent fall in the Shanghai sharemarket late last month.
Rising defaults in the US subprime mortgage sector also dulled risk appetite, but a flurry of corporate deals overnight sparked a broad recovery in global equities drawing investors back into carry trades.
Most of the kiwi's rise happened overnight. It was propelled to its highest since the start of the month, US70.20c, having climbed from US69.78c at 5pm yesterday, and it clung onto that at the close.
Even though the Australian dollar made a 10-year high above US80c today, the kiwi cross made a slight gain to A87.80c from A87.70c.
It made good ground on all the major crosses and the trade weighted index ended on 68.81 from 68.41 yesterday.
The ANZ bank said the lower risk aversion that had swung the NZ dollar carry trade back to centre stage opened a possible extension of the current kiwi move to US70.50c.
Selling pressures yesterday on the NZ dollar cross with the yen had been absorbed easily by exporter demand around A87.50c, which looked to be the base for today, ANZ said.
The yen retreated across the board and was given further impetus when the Nikkei share index opened stronger.
The Australian dollar hit a 10-year high of US80.35c, buoyed by speculation that Australia's central bank could raise interest rates as early as next month to fight inflation pressures.
It was unclear, however, just how aggressively investors would choose to rebuild yen carry positions given lingering concerns about the outlook for equities markets and as currency volatility remains high, market players said.
"Volatility is still stuck at high levels, and I think it could be difficult to take on fresh carry trade positions from here," said a trader for a Japanese trust bank.
Rates:
5pm today 5pm yesterday
NZ dlr/US dlr US70.20c US69.78c
NZ dlr/Aust dlr A87.80c A87.70c
NZ dlr/euro 0.5282 0.5245
NZ dlr/yen 82.71 81.87
NZ dlr/stg 36.09p 35.95p
NZ TWI 68.81 68.41
Australian dollar US79.99c US79.56c
Euro/US dollar 1.3294 1.3306
US dollar/yen 117.82 117.30
- NZPA