New Zealand Dollar Plunges As Central Bank Signals Rate Cut

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Thursday in Asia, the New Zealand dollar plummeted against its major counterparts after the Reserve Bank of New Zealand kept its benchmark interest rate unchanged for a second month and said it may cut borrowing costs further.

Amid the announcement, the kiwi tumbled to a fresh 3-week low against the aussie, 10-day low against the greenback and a 2-day low against the euro.

As widely expected, the Reserve Bank of New Zealand held its interest rate steady at a record low of 2.5% for a second straight month.

In a statement accompanying the rate decision, RBNZ Governor Alan Bollard said that despite signs of a leveling off in economic activity, the economy remains weak.

"We expect to see a patchy recovery get underway toward the end of the year, but it will be some time before growth returns to healthy levels," Bollard said.

The Bank also hinted that interest rates could go even lower, if policymakers felt the economy needed further stimulus.

"We consider it appropriate to continue to provide substantial monetary policy stimulus to the economy," the statement said. "The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010."

The RBNZ slashed borrowing costs by 5.75 percentage points between July 2008 and April 2009 to buoy an economy that began contracting in the first quarter of last year.

New Zealand's policy rate compared with 0.1 percent in Japan and as low as zero in the U.S.

Wholesale interest rates and the currency are higher than the central bank assumed, which "is not helping the sustainability of future growth and brings with it additional risks," Bollard said.

Finance Minister Bill English said this month the currency was "higher than fundamentals warrant" and may hamper his desire for the nation's recovery to be based around exports and investment rather than consumption led by borrowing.

The Reserve Bank's ongoing focus on the currency made it clear that Dr. Bollard would be particularly sensitive to any signs of faltering recovery with the NZ dollar at current levels.

In early Asian deals on Thursday, the New Zealand dollar slumped below the 0.65 level against the U.S. currency for the first time in 10-days, falling as low as 0.6481. On the downside, 0.640 is seen as the next target level for the NZ dollar. At yesterday's close, the kiwi-greenback pair was quoted at 0.6520.

Investors bought the US dollar as a safe-haven currency after the US Commerce Department said yesterday that orders for durable goods fell percent 2.5 percent in June from a downwardly revised 1.3 percent increase in May.

The kiwi-greenback pair soared to a 9 1/2 -month high of 0.6638 on July 28, up 12% this year on better risk appetite and higher oil prices.

But the kiwi pared its gains thereafter after a report showed that New Zealand's trade deficit grew faster than expected in June. Statistics New Zealand reported on Tuesday that the country logged a June trade deficit of NZ$417.0 million.

Thus far, the kiwi has lost more than 2% against the greenback from a 9 1/2 -month high.

The New Zealand dollar fell to 1.2613 against the Aussie during early Asian deals on Thursday. This set the lowest point for the kiwi since July 06. If the kiwi weakens further, it may likely target the 1.270 level.

The NZ dollar surged up to a 3-month high of 1.2353 on July 15. But the kiwi weakened on July 16 after credit rating agency, Fitch downgraded New Zealand's long-term sovereign credit rating outlook to negative from stable, citing concerns regarding the medium-term growth outlook for the country.

The rating agency affirmed New Zealand's Long-term foreign currency Issuer Default Rating at 'AA+', Long-term local currency IDR at 'AAA', Short-term foreign currency rating at 'F1+' and the Country Ceiling at 'AAA'.

The kiwi extended its slide against the aussie in the subsequent days and dropped 2% thus far. The Australian dollar was supported this week by comments from the Reserve Bank of Australia Governor Glenn Stevens, who said the nation's downturn may not be "one of the more serious" of the post-World War II era.

The New Zealand dollar that jumped to an 8 1/2 -month high of 2.1350 against the euro in late New York trading on Wednesday, lost ground in early Asian deals on Thursday. At 9:50 pm ET, the kiwi hit a 2-day low of 2.1677 against the euro. The next downside target level for the NZ dollar is seen around 2.176.

During early Asian deals on Thursday, the New Zealand dollar slipped against the yen as the latter was supported by an industrial production report.

Data released by the Ministry of Economy, Trade and Industry showed that Japan's industrial output rose a seasonally adjusted 2.4% month-on-month in June, after rising a revised 5.7% in the preceding month. Most economists expected a 2.5% rise in production.

Year-on-year, industrial output slipped an unadjusted 23.4%, slower than the 29.5% drop in May and also slower than the 23.6% fall expected by economists.

At 9:40 pm ET, the kiwi-yen pair touched 61.55, down from Wednesday's close of 61.95. The near term support for the NZ currency is seen around the 60.9 level.

Traders now look forward to the European session, in which the German July unemployment rate and the Euro-zone economic confidence reports for July are expected.

Across the Atlantic, the U.S. weekly jobless claims report for the week ended July 25th has been scheduled for release.

(Market News Provided by RTTNews)