Dollar pares gains ahead of current account, GDP data

By Paul McBeth

Wednesday 25th March 2009

The New Zealand dollar pared its gains ahead of current account data for the fourth quarter, which probably deteriorated to the widest annual deficit in more than a decade.

Investors will be watching the current account data after Finance Minister Bill English warned about New Zealand's "challenge of chronic twin deficits" yesterday, with the large external imbalance an ongoing risk for the currency.

New Zealand's current account gap for the three months to December 31 probably increased to $16.1 billion from $15.5, according to a Reuters survey. The relative strength index of the kiwi dollar rose as high as 91 this week. Technical analysts view a move above 70 as a sign that a currency may be poised to fall.

"After the finance minister's comments on the current account, people are switching their focus" back to local data, said Danica Hampton, currency strategist at Bank of New Zealand. "Treasury and the Reserve Bank have said while New Zealand has a high current account deficit, it's not unsustainable."

The kiwi fell to 56.45 US cents from 56.69 cents yesterday, and dropped to 55.19 yen from 55.95 yen. It sank to 80.71 Australian cents from 80.87 cents yesterday, and declined to 41.80 euro cents from 41.87 cents.

Hampton said the currency may trade between 55.50 US cents and 57 cents as it begins to "ease back" after outpacing the widening New Zealand-US swap spread this week.

The release of fourth-quarter gross domestic product figures on Friday will likely show the fourth consecutive contraction, and BNZ forecasts the economy probably shrank 1.1% for the period. "While not good news in itself, this stacks up favourably to the 1.6% drop seen in the US, and 1.5% decline seen in the UK and Eurozone and the 3.2% drop seen in Japan," Hampton said.

The Federal Reserve will start buying long-term Treasuries tomorrow under its US$300 billion plan to try and kick-start the US economy which fell into recession in December 2007.

The controversial move by the Fed to embark on a policy of quantitative easing sparked China's central bank Governor Zhou Xiaochuan to urge the International Monetary Fund to create a "super-sovereign reserve currency" as the Dollar Index, a measure of the US dollar versus six major currencies, slid 4.1% last week to 83.84, its biggest decline since 1985 when the US, UK, France, Japan and West Germany agreed to coordinate the devaluation of the currency against the yen and the deutsche mark.

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