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kiwi drops on S&P negative outlook

Monday 22nd November 2010

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The New Zealand dollar dropped 0.7% after Standard & Poor's put the country's foreign currency credit rating on a negative outlook, citing reduced fiscal flexibility.

S&P affirmed New Zealand's AA+/A-1+ foreign currency rating, and put it on a negative outlook, giving it a one-in-three chance of being downgraded in the next two years. The rating agency kept the outlook on New Zealand's AAA/A-1+ local currency rating at stable.

S&P credit analyst Kyran Curry said the revised outlook reflected the expected widening in New Zealand's external imbalances. Increased government savings will be an important component of any improvement. Among positives for the rating were the country's flexible monetary policy, strong institutions, economic resilience and its actively traded currency.

"New Zealand's vulnerability to external shocks, arising from its open and relatively undiversified economy, also raises risks to the country's economic recovery and credit quality," Curry said.

Prime Minister John Key told reporters the "decision was met with surprise by Finance Minister Bill English" who had met with rating agency officials two weeks ago. Key said he presumed the recent sovereign debt issues seeping out of Europe had played on S&P and led to the deteriorating outlook.

"At that meeting, no new issues were raised," Key said at today's post-Cabinet conference. "We can draw no other conclusion than that the international environment has changed."

Though the review may have surprised the government, its impact on the currency will be welcome as policy makers on all fronts have been complaining about the strength of the kiwi against the greenback in recent months.

Earlier this month, the local dollar rose above 70 on the trade-weighted index of major trading partners currencies and near a level it last reached when the Reserve Bank intervened in 2007. The TWI was recently at 68.84 on the TWI from 69.66 immediately before S&P's announcement.

Robin Clements, economist at UBS New Zealand, said the markets have been surprised by the decision and the lack of specific new developments cited in the report.

"Nothing I've read tells me what the change is," he said. "We're a highly indebted country with an exchange rate that is stubbornly high. If it (the currency) is lower because of this it is probably a good thing."

The kiwi recently traded at 77.44 US cents from 78.10 cents immediately before the announcement.

S&P also revised the outlooks to negative for New Plymouth District Council, Wellington City Council, Auckland District Health Board, Counties Manukau District Health Board, Housing New Zealand Corp. and Housing New Zealand Ltd.

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