Kiwi falls further, Euro bounces

The Kiwi dropped further on Friday night, trading down into the low .7500 area vs. the USD as the selling by speculators and international investors continued. Initially, the Euro also fell sharply trading as low as 1.2640 before regaining well over 1 cent vs. the USD.

The main focus over the weekend was the meeting of the G8 group of nations, who came out in support of Greece staying in the Eurozone. Newly elected French President Francois Hollande found an ally in US President Barrack Obama in his calls for more growth orientated polices for Europe. The US has taken a pro-growth approach to solving the crisis and appear to be well on the way to growth, whereas the Europeans have gone down the road of austerity, which has led to ongoing recession, high unemployment and now disaffected voters.

This week, there is another EU summit on Wednesday night NZ time. There is talk that the idea of Eurobonds will again be put forward. Under this plan, all members would provide backing for the Eurobonds including Germany. This would make the Bonds highly sort after and could potentially be a major circuit breaker to the crisis if they were to come into existence. However, Germany are firmly opposed to the idea at this stage, but as we have seen with Europe over the years, compromise is invariably reached, so we think there is a chance we will see some form of Eurobond issued at some point.

In the markets, the Kiwi starts the week around the .7550 area vs. the USD, down nearly a cent from Fridays open. The Kiwi has also lost ground against the other major currencies as the liquidation of New Zealand long positions continues. The Kiwi seems to have been the hardest hit of all the currencies, reflecting the scale of purchaser built up over March and April. However, given New Zealand’s solid underlying fundamentals the selling seems to be getting quite extreme and a rebound may not be too far away.

This week the local focus will be on Thursday’s annual budget announcement. There are now surprises expected in what the Government has called a “Zero Budget” for the lack of any new planned expenditure. This should keep the ratings agencies happy, given the Government will remain on track for moving back to surplus by 2014/15.

Despite the ongoing issues in Europe, the shared currency is proving resiliant