Monday in Asia, the New Zealand dollar slumped to new multi-year lows against its US and Japanese counterparts after the government said the New Zealand economy will remain in recession until at least March 2009.
The New Zealand economy shrank for the third consecutive quarter in September 2008 and indicators pointed to further quarterly declines in December 2008 and March 2009, the Treasury said today.
"All indicators suggest the New Zealand economy will remain in recession until at least March 2009. As a result, growth appears to be developing in line with the December Update downside scenario, at least in the near term, with recent international developments pointing to further downside risk", the Treasury stated.
Annual inflation declined to 3.4% in December from 5.1% in September. Average prices eased nearly 20% in the December quarter on lower fuel cost. The medium-term outlook for inflation eased considerably, the Treasury stated.
Adding to kiwi's selling pressure, another report showed that New Zealand's wage inflation slowed more than economists expected in the fourth quarter as rising unemployment reduced the pressure on companies to pay more to attract and retain workers.
Wages for non-government workers, excluding overtime, increased 0.7 percent from the third quarter when they gained 1.1 percent, according to Statistics New Zealand's labor cost index released in Wellington today. Wages increased 3.2 percent from a year earlier.
The Australian dollar also tumbled today, as extreme risk aversion and expectations of a deep interest rate cut this week dented investor sentiment. Appetite for riskier assets like stocks was hit by data showing the United States economy contracted at the fastest pace in nearly 27 years in the fourth quarter.
The aussie plunged to a 2-month low against the greenback, 3-month low against the loonie and a 12-day low against the yen.
Most of the stock markets across the Asia-Pacific region are trading lower today following another triple-digit loss on Wall Street Friday. Grim GDP data for the fourth quarter which showed that the U.S. economy contracted at the fastest pace in nearly 27 years and news that the latest bank rescue from the Treasury Department may not come to fruition weighed on investor sentiment.
Australian shares were hit by Treasurer Swan's statement that the Australian budget was headed for deficit as corporate revenues slow, with Swan saying that the global financial crisis could wipe A$50 billion from company taxes over four years and the IMF's weekend forecast that Australian GDP will contract 0.2% in 2009 versus its previous expectation for 2.2% growth.
The Aussie, which closed last week's trading at 0.6351 against the US currency slipped to 0.6307 during Asian deals on Monday. This set the lowest point for the aussie since December 5, 2008. If the aussie-greenback pair weakens further, it may test support around the 0.608 level.
Disappointing economic reports released from Australia today pushed down the aussie. Australian house prices fell for a third quarter in the three months through December as the threat of the nation's first recession since 1991 eroded demand for property.
An index measuring the weighted average of prices for established houses in the eight capital cities dropped 0.8 percent from the September quarter, when it declined a revised 2.4 percent, the Australian Bureau of Statistics said in Sydney today.
Meanwhile, the Australian Industry Group and Price Waterhouse Coopers said that the Performance of Manufacturing Index or PMI in Australia increased by 3.7% in January to a reading of 36.6. The PMI remained below the 50.0 score, that separates contraction from expansion, for the eighth consecutive month.
Additionally, the TD Securities/Melbourne Institute inflation gauge showed that Australia's January inflation was up 0.8% on month, and up 2.7% on year.
The Reserve Bank of Australia is scheduled to meet tomorrow to decide on interest rates. Analysts expect the central bank to slash interest rates by 1% to 3.25%.
The Australian dollar lost ground against the greenback after climbing to a 3-month high of 0.7271 on January 7. Since then, the aussie-greenback pair has depreciated 13%.
In Asian trading on Monday, the Aussie fell to a 3-month low of 0.7781 against the Canadian dollar. The next downside target level for the aussie is seen at 0.768. At last week's close, the aussie-loonie pair was quoted at 0.7799.
The Australian currency has been in a downward channel after it reached a 3-1/2 -month high of 0.8691 on January 4. Since then, the aussie has dropped 10% against the loonie.
Against the Japanese yen, the Australian dollar fell to a 10-day low of 56.52 during Asian deals on Monday. This may be compared to Friday's close of 57.13. On the downside, 56.3 is seen as the next target level for the Australian currency.
A further retreat in stock prices prompted investors to sell higher-yielding assets funded in Japan. In carry trade, investors borrow money from Japan where the interest rate is low to buy high yielding assets in other countries. So, an unwinding of carry trades results in traders liquidating their investments and scrambling for yen to repay their yen-denominated loans, which pushes up the value of the Japanese currency.
Japanese Prime Minister Taro Aso on Saturday announced US$17 billion worth package for Asia to combat the economic downturn. At the annual meeting of the World Economic Forum in Davos, Aso said it would be necessary to strengthen regional cooperation towards realizing Asia's growth potential and expanding domestic demand. Aso also stated that Japan would resolutely fight all protectionism.
The Aussie has lost 17% against the yen since reaching a 2-month high of 68.31 on January 6.
In Asian trading on Monday, the aussie edged down against the euro and touched a low of 2.0172 at 10:05 pm ET. If the aussie moves down further, it is likely to target the 2.0199 level. The euro-aussie pair was worth 2.0161 at Friday's close.
During Asian deals on Monday, the New Zealand dollar declined to 0.5020 against the US dollar. This set the lowest point for the kiwi since December 2002. The next downside target level for the kiwi-greenback pair is seen at 0.45. The pair closed Friday's North American session at 0.5078.
The kiwi surged to an 8-day high of 0.5377 against the greenback on January 28 ahead of the FOMC rate decision. As widely expected, the US Federal Open Market Committee left its funds rate unchanged at 0.25% as industrial production, housing starts and employment have continued to decline steeply, as consumers and businesses have cut back spending.
However, following the announcement, the kiwi pared its gains and was under heavy selling pressure as the Reserve Bank of New Zealand unexpectedly slashed its interest rate by 150 bps to a record low of 3.5% on January 29.
The kiwi-greenback pair has slumped 7% since reaching an 8-day high last week.
The New Zealand dollar traded down against the Japanese yen during Monday's Asian deals. The kiwi-yen pair that closed Friday's North American session at 45.70, is currently trading at a new multi-year low of 45.07. If the pair slides further, 42.2 is seen as the next target level.
Against the European currency, the New Zealand currency reached a 4-day high of 2.5035 during today's early Asian deals. Thereafter, the kiwi reversed its direction and slipped to 2.5366 at 10:05 pm ET, compared to Friday's closing value of 2.5182. The next downside target level for the New Zealand dollar is seen at 2.549.
The New Zealand dollar lost ground after hitting a 1-week high of 1.2471 against the Australian dollar at 8:25 pm ET Sunday. The kiwi that closed Friday's New York deals at 1.2514 against the Aussie is currently trading at 1.2586. If the New Zealand currency falls further, 1.273 is seen as the near term support level.
In the European session today, the manufacturing PMI reports from Italy, German, France and the Euro-zone are expected.
Across the Atlantic, the US personal income and spending, PCE deflator, construction spending and the ISM manufacturing reports have been slated for release.
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