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Sell the NZ Dollar as Their Economy Deteriorates

By    |   Tuesday, 16 Sep 2008 10:57 AM

In New Zealand, interest rates are being cut quite swiftly these days. Last Thursday, Sept. 11, the Bank of New Zealand cut interest rates by 50 basis points, which was much more than the 25 basis points expected.

Why? Well, there's a whole grocery list of reasons. Let's take a look at a few of them.

For starters, the Reserve Bank of New Zealand is forecasting a recession for New Zealand. There's just a whole host of things going against it all at once.

The economy (as shown by the GDP numbers) shrank last quarter, and the central bank is forecasting that GDP will shrink again this quarter by 0.2 percent. Formerly, they thought that the economy might actually expand by this amount rather than contract..

They also expect the contraction to worsen in the third quarter to 0.3 percent.

So the economy is contracting, and that proves the need for interest rate cuts to get the economy growing once again. This will take some time, and their currency will reflect this outlook for quite some time by falling.

This contraction is also showing up in their retail numbers coming in at negative 0.8 percent this past month. Even the core number came in at negative 0.2 percent. So retail sales are also in a contraction.

But it doesn't stop here. This past week the manufacturing numbers also came out. It too is contracting with a reading of 45.7. Anything below 50 means that the manufacturing sector is in a contraction, and anything above 50 means the manufacturing sector is expanding.

So the economy is contracting, retail sales are contracting, manufacturing is also contracting. What else is happening that has already driven this currency to a 22-month low? Comments from the central bank, that's what.

Central bank governor Alan Bollard was quoted as saying, "We've got room to move," meaning that the slumping economy warrants them being in rate-cut mode. Also, just so they didn't leave anything to the imagination, he was later quoted as saying, "We're in a loosening mode."

So there you go. Rates will continue to head lower.

Money tends to run from lowering rates. After all, who wants to make less interest on their money? That gives investors the incentive to move on to greener pastures.

So what else is bringing this economy into its first recession since 1998? Well, they've experienced a hard drought over there, and that's really bad when your economy is largely dependant upon agriculture and dairy products. The drought curbed dairy production and shipments of milk powder and cheese.

Now this may not sound important, but keep in mind that dairy products are their largest export. It makes up 30 percent of their economy. So this is huge.

The economic downturn has really hit consumer confidence as well. Why? There have been huge increases in the basic cost of living as gas prices went higher and interest rates remained staggeringly high. This acts like a tax on consumers since the cost of borrowing remains high, and the more they have to pay for gas and interest, the less they have to spend on retail goods.

This latest rate reduction is the worst since 2001, which was when the Bank of New Zealand had to cut interest rates twice by 50 basis points after the terrorist attacks on the United States. That's right. The attacks didn't just hurt America, but it had a ripple effect around the world with countries that America does business with, New Zealand being one of those countries.

Their next interest rate meeting will be on Oct. 23. It's anticipated that they will cut rates once again but by 25 basis points this time. And I'd expect these rate cuts to continue for the coming months. This will keep the kiwi (the nickname for the New Zealand dollar) heading downward overall.

This is why investors should consider selling short this currency against the U.S. dollar (NZD/USD) upon any sizable rally upward. The rally will most likely be fleeting as the bank continues to lower rates, and as the economy continues to crumble even more in the near term.

So expect 2009 to be a rough year for the kiwi dollar as it reflects what's happening with their economy.

It remains to be seen if their economy will grow at all throughout the entire year of 2009. However, there is some anemic growth forecasted at this point by the bank of 0.3 percent. However, those expectations could end up being revised downward just like near-term expectations have been.

This is a hard fall for New Zealand considering that their economy grew 3.1 percent last year. So the brakes have been put on very hard, and their currency will continue to reflect this condition for quite some months to come.

Expect the kiwi dollar to be the red-headed stepchild of currencies for a while. There will be many better picks for buy positions out there, and that is another reason why the kiwi dollar will continue to fall. So consider selling the NZD/USD pair upon rallies, and watch their economy for an eventual turn around.

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SeanHyman
In New Zealand, interest rates are being cut quite swiftly these days. Last Thursday, Sept. 11, the Bank of New Zealand cut interest rates by 50 basis points, which was much more than the 25 basis points expected. Why? Well, there's a whole grocery list of reasons. Let's...
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2008-57-16
Tuesday, 16 Sep 2008 10:57 AM
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