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NZ dollar drops after weaker Chinese manufacturing, higher Australian inflation

Wednesday 24th July 2013

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The New Zealand dollar dropped after a preliminary report showed Chinese manufacturing was weaker than expected, raising concerns the world's second-largest economy is losing momentum.

The kiwi fell as low as 79.45 US cents from 80.01 cents immediately before the Chinese report was released at 1:45pm local time. The New Zealand dollar fell as low as 85.77 Australian cents following the PMI and data at 1:30pm showing higher-than-expected Australian inflation, having climbed as high as 86.27 cents immediately before the inflation figures. It was last at 86.01 Australian cents.

Activity in China's manufacturing sector slowed to an 11-month low in July as new orders faltered and the job market weakened. The New Zealand and Australian dollars dropped as the report renewed fears of a sharp slowdown in China which is Australia's largest export market, and New Zealand's second-largest export market behind Australia.

"Any weaker number in China is generally going to affect commodity currencies like this - we are being dragged a lot by the Aussie dollar as well which probably has a larger direct correlation to China," said Alex Hill, head of dealing at HiFX. "Weaker economic numbers in China generally will point to less demand for commodities and so therefore you are seeing a weakening in the Australian dollar and in the New Zealand dollar."

The flash HSBC/Markit Purchasing Managers' Index fell to 47.7 this month, missing expectations it would hold at last month's 48.2 level and the lowest level since August 2012. It is the third straight month below the key 50 level which signals a contraction. A sub-index measuring employment slid to its weakest since March 2009 while the measure of new orders fell to its lowest level in 11 months.

The New Zealand dollar weakened against the Australian dollar after a report showed underlying Australian inflation rose 0.6 percent on average in the second quarter, just above Reuters forecasts for a 0.5 percent increase. If inflation flares in Australia there is less prospect its central bank will cut interest rates, and it may be closer to a hike, keeping a premium over New Zealand's benchmark rate.

Higher inflation caused the Aussie to strengthen against many currencies, especially the kiwi, said HiFX's Hill. The Aussie has since pulled back after the report on Chinese manufacturing overshadowed the inflation numbers, he said.

The HSBC PMI is published about a week before the final reading and is the earliest available indicator of monthly activity in the Chinese economy.

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