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New Zealand Dollar Continues Slide Following Downgrade

New Zealand Dollar Continues Slide Following Downgrade

2011-09-30 04:00:00
Lujia Lin,
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THE TAKEAWAY: Fitch, S&P downgrade New Zealand’s credit rating > Downgrades come after mixed economic data releases > New Zealand Dollar trades lower

The Kiwi continued to weaken after Standard & Poor’s became the second rating agency within hours to downgrade New Zealand. As of 04:00 GMT, the Kiwi has continued its downward trend and has broken through support at the 0.7650 level versus the US Dollar. The sell-off comes as markets absorb conflicting signals from the island economy, with the S&P downgrade announced on the heels of strong building-approvals data.

New_Zealand_Dollar_Continues_Slide_Following_Downgrade_body_Picture_5.png, New Zealand Dollar Continues Slide Following Downgrade

Source: FXCM Strategy Trader

Fitch and S&P announced their credit-rating downgrades for the South Pacific nation within hours of one another. Both agencies downgraded New Zealand’s foreign-currency rating one level from AA+ to AA, while S&P also cut the country’s local-currency rating from AAA to AA+. S&P noted the rising level of household- and agricultural sector debt as a major contributor to its decision. The agency also cited the country’s record budget deficit – which rose to over 8 percent on post-earthquake reconstruction spending – in addition to the burgeoning current-account deficit, at close to 4 percent of GDP, as factors leading to the downgrade.

The downgrades come at a time when the New Zealand economy is showing increasing signs of cooling. Despite the positive building-permits data, the NBNZ Activity Outlook and Business Confidence gauges both dropped in August, and exports remain weak. These factors, in addition to a possible increase in borrowing costs associated with the downgrades, imply that the RBNZ would be even less likely to raise interest rates this year. Downward pressure on the New Zealand Dollar can be expected to continue.

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