The New Zealand dollar soared to a fresh seven-month high Friday, as traders piled into the currency as an austere budget attracted a favorable review of the country's credit rating by ratings agencies.
Freed from the threat of a rating downgrade, the Kiwi took advantage of a broadly weaker U.S. dollar and strong equities to tap US$0.6289 in late trade, the highest point since Oct. 14, 2008.
"We've ticked all the right boxes from a local perspective with S&P revising the outlook to stable. This allows the Kiwi to take advantage of a global upswing in confidence," said Chris Hunter, a senior dealer at Custom House New Zealand.
Standard & Poor's revised New Zealand's AA-plus foreign currency rating outlook to stable from negative, saying measures in the "budget will support stabilization in the government's fiscal position over the medium term." Moody's Investors Service also said in a release that because the country's finances are starting from a relatively strong position, the Aaa rating "was not immediately affected by the projected debt path."
The government's budget, delivered Thursday, was seen as a test case for retaining New Zealand's investment grade sovereign rating, and the Kiwi has been partly held back on concerns about the debt blowout.
Hunter says the Kiwi can look to take advantage of the recovering sentiment given the government has committed to cutting spending and set out a plan to contain debt over the next seven years.
Despite the gloomy domestic economic outlook, the momentum points to further gains, he said.
"Things are still bad but people are saying we are moving out of the worst period. In this environment you could see the Kiwi go towards 65 (U.S.) cents in the next month or so."
Government bonds rose and swap rates fell as the lack of fiscal stimulus reinforced the central bank's recent message that interest rates will remain low for an extended period.
"There's this realization that monetary policy will have to do the hard yards. This means that rates will be low for some time," said one trader.
The trader said the market was also responding to the fact that the bond tender program over the next four years will remain largely unchanged from Treasury's December forecast.
Moreover, Thursday's NZ$200 million bond tender achieved solid results, he said, with strong bid-to-cover indicating good appetite for government paper.
"With the economy likely to remain weak for this year I think the market is signaling that rates can go lower from these levels," he said.
