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The New Zealand dollar continues to slide, reaching a three−month low of 0.7730 overnight

Wed, Apr 30 2008, 05:53 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar continues to slide, reaching a three-month low of 0.7730 overnight. The move began with yesterday’s surprise $50m trade deficit, which dragged the currency from 0.7860 to 0.7820 over the day. The selling continued overnight, with signs that ‘macro’ traders are looking to establish medium-term short positions, in hope of a sustained move lower. Broad-based gains in the US dollar further encouraged the move lower. The Australian dollar was dragged lower as well, but managed to find support through bids in AUD/NZD, taking the cross rate through the 1.20 level and on to its highest levels since November last year.

The US dollar gained on position-squaring ahead of tomorrow morning’s Fed rate review. Market expectations have settled around a 25bp cut, and a pause over future meetings. However, the continued flow of weak economic data and the expectation of more to come has seen the market back off a little from the view that the Fed has finished easing – short-term rates have fallen 20-30bp from their highs in recent days.

US consumer confidence fell from 65.9 to 62.3 in April, though this was not as bad as forecast. The current situation reading slumped 9.9 pts, reflecting amongst other factors a further sharp decline in consumers’ assessment of the labour market. Also, the proportion of respondents intending to take a holiday in the next six months fell to a thirty year low, and one year inflation expectations jumped from 6.1% in March to 6.8%. These responses confirm that ever higher gasoline prices, the weaker dollar and mounting job losses are weighing heavily on Americans’ perceptions of their personal well-being. The Case/Shiller index of house prices fell 12.7%yr, worse than expected. In every month since June last year, the size of monthly decline has accelerated, suggesting that the housing market is nowhere near bottoming.

The euro began on a soft note as earnings reports from the European finance sector rolled in. IKB, the German bank being sold after a bailout over US subprime investments, had a first-half loss of €1.6bn; Allianz, Europe’s biggest insurer, said firstquarter profit fell 66% after writedowns at its Dresdner Bank unit, and Deutsche Bank, Germany’s biggest bank, reported its first quarterly loss in five years after €2.7bn of credit writedowns. The currency fell further after the Euroland retail PMI for April fell to 41.8, providing further evidence that the Euroland economy has turned weaker since the end of Q1.

The pound was one of the worst performers, falling more than 1% on further evidence that UK households are struggling. Credit data for March showed the lowest number of mortgage applications since this data series began in 1993, while consumer credit also slowed, despite anecdotes that consumers have been building up credit card debt because other alternatives were no longer available. The Confederation of British Industry also reported a steep slump in sales in April. A further decline in consumer confidence to a 15-year low adds weight to the view that the resilience in the official retail sales figures at the start of this year is unlikely to last. But will rates be cut again soon? BoE Governor King gave no such hints in comments to the Treasury Select Committee today, where he instead focussed on the likelihood that inflation would rise to and then hold around 3% for some time to come.

Outlook

With the New Zealand economy set for a sharp slowdown this year, owing at least as much to domestic factors as to the turmoil offshore, the NZD is likely to lag among the major currencies. NZ interest rates now have the steepest implied easing track among the major economies, a profile was given further support by last week’s dovish RBNZ statement. However, any underperformance is more likely to be reflected in the non- USD crosses, with the US dollar still struggling to get traction even with the market now anticipating an end to the Fed easing cycle.

Today’s data is expected to reinforce the gloomy near-term outlook for the economy. Building consents probably fell further in March, with the early Easter adding to the downside risks. Residential consents will reflect the sharp fall in housing turnover, while non-residential consents are now starting to soften as well. Business confidence is already at record lows, and there has been little reason for firms to become more upbeat in the last month.

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Published on  Wed, Apr 30 2008, 05:56 GMT