NZ dollar tumbles after Fitch lowers credit rating outlook to negative

Thursday 16th July 2009

The New Zealand dollar tumbled from a two-week high after Fitch Ratings lowered the nation’s AA+ credit rating outlook to ‘negative’ from ‘stable’, citing the nation’s looming current account deficit and rising debt levels.

The kiwi declined to 64.07 U.S. cents, and earlier sank as low as 63.89 cents, from 64.61 cents immediately before Fitch released its report. It fell to 80.19 Australian cents from 80.74 cents. The currency declined to 60.17 yen from 60.70. Fitch said New Zealand’s current account gap “remains large and is projected to remain above the level necessary to stabilise and reduce New Zealand's net foreign liabilities.”

The Fitch move comes after Standard & Poor’s raised the outlook on the sovereign ratings outlook to ‘stable’ after the government pared back spending in its May budget.

“A negative outlook is unexpected, but at the same time unsurprising,” said Bernard Doyle, New Zealand Strategist at Goldman Sachs JBWere. New Zealand’s economy is “treading a fine line” between a relatively healthy fiscal position and a yet-to-stabilise deterioration in the external debt position.

Doyle said the currency reaction may be welcomed by Reserve Bank Governor Alan Bollard, who has warned against big bets on gained in the kiwi dollar because of the lopsided nature of the economy, which has been driven by consumer spending rather than exports and investment.

New Zealand’s current account gap narrowed to 8.5% of GDP in the year through March, from 8.9% in the same period three months earlier.

Making a readjustment more difficult are New Zealand’s “historically low real interest rates and the current accommodative fiscal stance,” Fitch said.

“There is a risk that the required balance sheet adjustment by households and, more generally the private sector, will be insufficient in reducing the current account deficit and foreign indebtedness to a more sustainable and safe level,” it said.

The New Zealand dollar earlier pushed higher as a better-than-expected outlook for U.S. corporate earnings spurred a rally in global stock markets, while figures showed economic growth in China rebounded in the second quarter, underpinning commodity currencies such as the kiwi.

Businesswire.co.nz

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