New Zealand Dollar Rises As Economy Emerges From Recession

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Wednesday in Asia, the New Zealand dollar strengthened against its major counterparts after a government report showed the economy unexpectedly grew in the second quarter, ending the country's worst recession in three decades.

The NZ dollar jumped to nearly a 1-year high against the yen, 13 1/2 -month high against the greenback, 15-month high against the euro and an 8-month high against the Aussie.

Statistics New Zealand reported today that the nation's economy expanded by 0.1 percent for the three months through June 2009. It marked the first expansion after 15 months of contraction.

The agency noted however, that the expansion was so small that many economists might not consider it a sign of economic recovery. Nonetheless, the expansion comes as a surprise to most economists, who had forecast negative GDP growth of 0.2 percent for the quarter.

For the full year ending in June 2009, economic activity contracted 1.8 percent, the largest on-year contraction since record keeping began in 1987.

The data affirms the projections of Reserve Bank of New Zealand Governor Alan Bollard, who said a patchy recovery likely began in the current quarter.

Bollard this month forecast that the economy shrank 0.1 percent in the second quarter and would undergo a "patchy recovery" in the second half of the year. He projected growth of about 0.8 percent a quarter in 2010.

Gross domestic product began contracting early last year after Bollard raised interest rates in 2007 to counter a housing boom and consumer spending that was being fanned by excessive borrowing.

The NZIER report released yesterday said that the firm expects the country to resume growth in the September quarter, rising 0.1%, after a contraction of 0.2% in the June quarter. Moreover, the firm revised upwards its economic growth forecast for the year ended March 2010, to a decline of 1.3% from a 1.6% contraction estimated in its June survey.

Thus far this week, the NZ dollar strengthened 1.8% against the aussie, 3.2% against the greenback, 2.4% against the yen and 2.1% against the euro as reports showed that New Zealand economy reported better-than-expected current account balance in the second quarter and Fonterra Cooperative Group Ltd., the world's largest dairy company, raised its milk price forecast yesterday for the coming year, boosting farm incomes.

Last week, Bill English the New Zealand Finance Minister said that the currency value appear to be stronger than what the fundamentals can support. A strong currency is causing concern for exporters. English said there are other ways to help them than the central bank intervening in the currency market.

Increasing currency value affected exports badly as New Zealand products lost a major competitive advantage.

The New Zealand dollar, which closed yesterday's trading at 0.7189 against the U.S. currency rose to a 13 1/2 -month high of 0.7316 during early Asian deals on Wednesday. The next upside target level for the kiwi-greenback pair is seen at 0.740.

After hitting a 6-1/2 -year low of 0.490 in March 2009, the kiwi strengthened 33% against the U.S. currency as prospects of a global economic revival spurred demand for higher-yielding assets.

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations' higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

In early Asian deals on Wednesday, the New Zealand dollar climbed to nearly a 1-year high of 66.33 against the yen. That was up 1.2% from Tuesday's closing value of 65.56. If the kiwi-yen pair advances further, it may target the 67.3 level.

Thus far, the kiwi has gained 33% against the yen since it touched a 9-year low of 44.29 in February 2009.

Against the euro, the New Zealand dollar jumped to a 15-month high of 2.0294 in early Asian trading on Wednesday. On the upside, 1.97 is seen as the next target level for the NZ currency. At yesterday's close, the euro-kiwi pair was quoted at 2.0575.

The NZ dollar that plunged to a record low of 2.5807 against the euro in February 2009 has been steadily climbing since then and strengthened more than 21% thus far.

During Asian deals on Wednesday, the New Zealand dollar soared to an 8-month high of 1.2028 against the Aussie. The next upside target for the kiwi is seen at the 1.19 level. The aussie-kiwi pair was worth 1.2162 at yesterday's close.

The kiwi advanced against the aussie after touching a 1-month low of 1.2486 on September 09 as the New Zealand central bank policy makers saw a bottoming-out of the nation's economy.

While leaving the nation's benchmark interest rates unchanged at 2.5%, the Reserve Bank of New Zealand Governor Alan Bollard said the rates are expected to remain at their current level, or go lower, into next year.

Disappointing Australia's retail sales and employment reports also exerted downward pressure on the aussie-kiwi pair. The kiwi has appreciated 4% against the aussie since reaching a 1-month low on September 09.

In the upcoming European session, the French consumer spending for August, business confidence indicator for September, Euro-zone July industrial new orders and the manufacturing PMI reports from the Euro-zone economies for September are expected to influence trading.

Across the Atlantic, the U.S. Federal Reserve Open Market Committee is scheduled to announce its interest rate decision at 2:15 pm ET. While the Fed is likely to hold interest rates, markets will be watching for any comments indicating the Fed might wind back its accommodative policy stance in view of improving economic data.

(Market News Provided by RTTNews)