Tuesday, the New Zealand dollar plummeted to a fresh multi-month low against the Australian dollar after a government report said that consumer prices in New Zealand declined in the fourth quarter of 2008, fueling expectations that the Reserve Bank of New Zealand will cut the benchmark interest rate to a record low next week. The kiwi also slumped to new multi-day lows against its other major counterparts.
Inflation in New Zealand plunged by the most in a decade during the final quarter of 2008 as fuel prices slumped. Statistics NZ reported today that the country's Consumer Price Index (CPI) declined 0.5 percent during the three months through December compared to the previous three months, but was 3.4 percent higher than one year earlier. Nevertheless, the annual inflation was tamer than the 5.1% rate recorded in the September quarter, representing an 18-year high.
Commenting on the CPI report, economists at Westpac NZ said "Today's inflation data will not change the RBNZ's modus operandi. Focus will remain on the international situation, weak domestic economy and low inflation outlook. The economy is in reverse and with spare capacity increasing and labour market deteriorating we expect further substantial cuts in interest rates,"
The economic numbers released from the New Zealand economy last week pointed towards a sharp-downturn. In December, the Treasury had said in its monthly economic report that the labor market continued to weaken in the September quarter and the unemployment rate rose to 4.2%, its highest level since the December 2003 quarter.
According to Treasury's half-yearly economic forecast, real GDP is forecast to grow 0.3% in the year ending March 2009. Growth is expected to remain weak at 0.8% in 2010, down from the 1.8% estimate issued in the Pre-election update. Elsewhere on last Thursday, two separate reports showed house prices in New Zealand declined in December.
These data points fortify expectations that the bank is expected to slash rate on January 29. The central bank has trimmed 3.25% off borrowing costs to date, with traders expecting a 100-basis points cut to 4.00% next week.
Last week, New Zealand's Prime Minister John Key said the economy is not expected to grow in 2009 as weak global demand hit exports. He noted that unemployment is likely to increase sharply in the coming days as companies cut jobs to survive in adverse economic conditions.
Yesterday, the Australian and New Zealand dollars strengthened to new multi-day highs against their most major counterparts, boosted by better risk appetite after stock markets in the regions surged up on optimism over U.S. economic stimulus measures.
But the Aussie and Kiwi pared their gains today as the Asian stocks opened sharply lower and commodity prices continued to remain weak.
Against the Aussie, the NZ currency plunged to a new multi-month low of 1.2491 during Asian deals on Tuesday. On the downside, the kiwi is likely to target the 1.270 level against the Aussie.
The kiwi has been in a downward channel against the Australian dollar after it reached a new multi-year high of 1.0657 on October 10. Since then, the NZ dollar has lost around 15%.
The New Zealand dollar fell to a 5-day low of 0.5309 against the US currency during Asian trading on Tuesday. The next downside target for the kiwi-greenback pair is seen around the 0.520 level.
The financial markets in the United States were closed yesterday for Martin Luther King Day. There are no important economic reports to be released from US today.
In early Asian deals on Thursday, the New Zealand dollar slipped to a 4-day low of 47.88 against the Japanese yen. If the kiwi weakens further, it may test support around a new multi-year low 47.18 against the yen.
The Japanese yen has been gaining against its major counterparts despite the release of a weak economic report today. An index measuring activity in Japan's service industry was down by a seasonally adjusted 0.9 percent in November compared to the previous month, the Ministry of Economy, Trade and Industry said on Tuesday. The index declined to 107.9 from the previous month's 108.8.
Hitting its lowest value since September 2006, it came in slightly below analyst expectations that called for a 0.8 percent decline following the revised 0.5 percent monthly increase in October.
During early Asian deals on Thursday, the New Zealand dollar weakened to a new multi-day low of 2.4489 against the euro. The next downside target for the kiwi is around the 2.476 level.
The Markets will now focus on the busy European session, in which Italian industrial orders, German and the Euro-Zone ZEW survey reports for the month of January are expected.
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