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Surprise Aussie Rate Cut Boosts NZD, NZ Shares

Fuseworks Media
Fuseworks Media

Wellington, Oct 7 NZPA - A surprisingly deep interest rate cut across the Tasman helped New Zealand's sharemarket and currency recoup some of today's heavy losses after a global rout.

The New Zealand dollar, which slid 4 percent overnight to a two-year low against the greenback, initially plunged along with the Aussie, then recovered after the Reserve Bank of Australia (RBA) slashed the official cash rate by 100 basis points to 6 percent.

The RBA's move added weight to expectations of a sizeable rate cut when the Reserve Bank of New Zealand meets on October 23, when the market had already priced in a 50-point cut from the current 7.50 percent.

The RBA's move prompted global talk of co-ordinated central bank action to stem the worsening credit crisis.

"At the moment, any bad news we just see a continuation of the risk aversion," said Westpac NZ head of financial market sales, Jake Soares.

"Any slight positive news, like a 100-point cut by the RBA or injection by the Fed, the market takes that as good news and the US dollar weakens, and kiwi benefits from that."

The yen retreated against other currencies after the RBA's surprising move improved investor appetite for risk and boosted stocks, higher-yielding currencies and commodities.

There was also evidence that investors believed that panic selling in currencies such as the euro and Australian and New Zealand dollars the previous day had gone too far.

New Zealand shares also recovered after the Australian sharemarket climbed into the black following the RBA rate cut.

The NZSX-50 closed down 1.4 percent, an improvement from earlier lows of more than 2 percent as panic selling spread to Asian markets, after heavy losses overnight.

"Things are very cheap and there is probably some bargain-hunting," said Macquarie Equities investment advisor Brad Gordon.

"I think you've probably seen a lead especially from Australia, and Dow futures are up, so that's probably providing a level of comfort that it may be time to enter back into the market."

The $US700 billion ($NZ1.12 trillion) US rescue fund, measures by European governments and massive injections of funds by central banks have not been able to shore up confidence in the financial system.

European share markets suffered their worst one-day percentage fall on record on Monday, sinking to four-year closing lows as investors dumped shares across the board.

In the US, the Dow finished below 10,000 points for the first time in four years, on concerns that fallout from the escalating credit crisis will drag the global economy into recession and cripple profits.

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