[Calxy]

There are a large amount of NZD uridashi and EuroKiwi redemptions falling due in July and August. This has weighed upon the NZD recently although we do not expect it to be a significant negative. Eurokiwi bonds are held by mainly professional investors and their FX exposure is hedged, so the unwinding of bond exposures would also see an unwinding of the hedging and therefore would be neutral for the NZD.

Uridashi are more challenging. They are not all held by professional investors and usually unhedged. Redemptions in July and August are above average - NZD1.09bn and NZD0.96bn vs an average of NZD0.64bn. Rollover rates on these bonds have dropped significantly in the New Year. But: 1) The fall in rollover rates is largely due to investors preferring to use margin accounts and short-term deposits to invest in NZD; 2) Uridashi redemptions were just as large in January-March 2009 and NZD/USD rallied from 0.50-0.57 during this period, this while the RBNZ was still cutting rates; and 3) Market research suggests that as long as New Zealand keeps a significant yield advantage over its investment partners - UK, US, Australia and Japan - that the main factor determining investment inflows is risk sentiment. While the yield advantage over Australia has disappeared, on an investor weighted average, the NZD still has a significant yield advantage. Also, the VIX index has been declining all year. While the news on bond redemptions may pressure the NZD in the short-run, we think that ultimately the flows will have little impact on the currency.