NZ dollar edges lower on Portugal downgrade, ahead of GDP data

Thursday 25th March 2010

The New Zealand dollar edged lower after Fitch Ratings cut Portugal’s credit rating over fears of a budget blow-out, while local investors await fourth-quarter gross domestic product data, which is expected to show economy accelerated in the final months of 2009.

Fitch cut Portugal’s credit rating to AA- from AA and warned another downgrade might be forthcoming if it fails to rein in its budget. The news pushed stocks on Wall Street and in Europe lower as investors eschewed higher yields in favour of the US dollar, a so-called ‘safe haven’ asset. New Zealand’s economy probably grew 0.8% in the three months ended December 31, according to a Reuters survey, and the kiwi dollar will probably hold above 70 US cents today if the data comes in as expected.

The risk aversion “was all about Portugal and its Fitch downgrade – everybody forgot about Greece and there were some massive moves in bond rates as U.S. debt was sold off,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “The kiwi’s well supported and it would need something significantly above 0.8% (in the GDP reading) to get the market going.”

The kiwi slipped to 70.22 US cents from 70.38 cents yesterday, and rose to 65.67 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 65.47. It jumped to 64.74 yen from 63.99 yen yesterday, and gained to 77.29 Australian cents from 76.88 cents. It edged up to 52.67 euro cents from 52.54 cents yesterday, and increased to 47.16 pence from 46.97 pence.

Kelleher said the currency may trade between 70 US cents and 70.50 cents today in what he calls a “patchy” recovery.

The kiwi dollar “out-performed” against the euro amid the Portugal downgrade and ahead of the European Union summit which may help decide the future bail-out of Greece and that country’s fiscal woes.

Kelleher said the New Zealand currency was strongly up against the yen as investors slowed down their repatriation of Japan’s currency ahead of month-end, and he predicts the kiwi will perform well on that cross over the next week or two.

The U.K. government will proceed with its plan to cut its budget deficit in half, according to Chancellor Alistair Darling’s budget. Still, fiscal tightening won’t take place until the recovery is assured, and the deficit will remain around 11% of GDP this financial year.

Businesswire.co.nz

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