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New Zealand Dollar Soars as Unemployment Unexpectedly Plummets

New Zealand Dollar Soars as Unemployment Unexpectedly Plummets

2010-05-06 04:47:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

New Zealand Dollar Soars as Unemployment Plummets
• Australian Retail Sales Disappoint, Trade Gap Widens


Critical Levels

eu pics 1

The Euro and the British Pound edged higher against the US Dollar in Asian hours as traders digested the greenback’s NY-session advance. We remain short EURUSD at 1.4881.

Asia Session Highlights

eu pics 2

New Zealand Employment grew 1 percent in the first quarter, topping expectations of a 0.2 percent increase. The Unemployment Rate fell to 6 percent – the lowest since the second quarter of 2009 – marking the first decline in over two years. The New Zealand Dollar soared against its major counterparts after the report crossed the wires as traders bet that robust labor markets would boost consumption and ramp up economic growth, leading the central bank to raise interest rates in the near term. Indeed, a Credit Suisse gauge of the markets’ monetary policy expectations shows investors see a 98 percent chance of a 25bps rate increase in June versus just 64 percent just a week ago. Cautionary comments from RBNZ Governor Alan Bollard were not enough to meaningfully cool the Kiwi dollar’s advance. The central bank chief said rates will not need to rise as far as in previous tightening cycles, adding policymakers do not intend to “touch the brake pedal” for some time.

Australian Retail Sales disappointed in March, adding 0.3 percent from the previous month and underperforming forecasts for a 0.7 percent increase. Household appliance sales proved to be the most significant drag on retail activity, down 1 percent from February. A separate report showed the Trade Balance deficit widened for the third consecutive month to –A$2.1 billion as overseas oil purchases pushed imports to outpace the gain in overseas sales.

Euro Session: What to Expect

eu pics 3

An interest rate decision from the European Central Bank headlines the economic calendar in European hours. The outcome is unlikely to produce any significant changes with inflation well below the 2 percent target level and economic growth showing signs of slowing momentum in the first quarter. Instead, all eyes will be focused on ECB President Jean-Claude Trichet’s press conference following the announcement, with the central bank chief will sure be grilled about Greece as well as the implications of any future bailouts for monetary policy. In fact, some analysts are already suggesting that the Euro Zone may opt to inflate its way out of debt by slashing borrowing costs and resorting to quantitative easing should a major member state succumb to sovereign risk concerns.

The UK general election will also be in focus as months of speculation end with voters finally heading to the polls. A series of televised debates between the candidates for Prime Minister produced a serious contender in the Liberal Democrat’s Nick Clegg, meaning that displacing the broadly disliked Gordon Brown and his Labour party will not necessarily secure a majority for the top-contender Conservatives and threatening to create the first “hung parliament” since 1974. This could prove to have dire outcome for British Pound, with investors fearful that a divided government will not have the conviction to meaningfully deal with the nation’s soaring budget deficit, a gap approaching 12 percent of GDP.


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