New Zealand Dollar May be Threatened by Fiscal Deficits, Credit Ratings

Published May 23rd, 2009 - 02:00 GMT

The New Zealand dollar was the best-performing currency of the G10, as modest gains in global risky asset classes combined with pronounced US Dollar weakness to push the NZD/USD to fresh 7-month highs. A relatively uneventful week of economic event risk had little effect on the antipodean currency.





New Zealand Dollar May be Threatened by Fiscal Deficits, Credit Ratings

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The New Zealand dollar was the best-performing currency of the G10, as modest gains in global risky asset classes combined with pronounced US Dollar weakness to push the NZD/USD to fresh 7-month highs. A relatively uneventful week of economic event risk had little effect on the antipodean currency. Generally robust risk appetite instead boosted speculative demand for the relatively high-yielding currency. The safe-haven Japanese Yen was tellingly the second-worst performer through Friday’s close, and the NZD/JPY exchange rate is on pace to test key multi-month highs on current bullish momentum.

In a week where the US Dollar fell on concerns over rapidly-escalating fiscal budget deficits and sovereign debt credit ratings, it is interesting to note that the New Zealand Dollar remained unscathed. Global investors eschewed US Dollar-denominated asset classes following news that Moody’s downgraded its credit rating outlook on UK Government bonds. Fear that a major credit rating agency would take similar action on US Government bonds suddenly became the major driver of currency markets—sending the US Dollar to Year-to-Date lows against the euro and other key currencies. We would argue that a US debt downgrade is highly unlikely through the near-term, and a downgrade of New Zealand’s prized top sovereign debt rating seems to be the more tangible risk.

The New Zealand government remains highly dependent on foreign demand for its debt, and funding costs remain relatively low on its top Aaa and AAA debt ratings from Moody’s and S&P agencies. Yet stable outlook from both firms may come into question if the upcoming Annual Budget announcement shows expectations for outsized fiscal deficits. Though such announcements have not historically forced major moves in currency markets, traders remain especially sensitive to sovereign creditworthiness. The New Zealand government must walk a fine line and balance economic stimulus with fiscal responsibility. Implications for the currency are relatively clear: any hint of a threat of credit downgrade would easily force losses in the risk-sensitive New Zealand dollar. - DR
 

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