New Zealand's Gross Domestic Product declined -0.1% from an expected increase of 0.2%. The country's 7.25% short term rates - the highest in the industrialized world - are choking economic demand with many analysts now predicting the possibility of a recession in 2006.
However, RBNZ's arch-conservative governor Allan Bollard has been adamant about maintaining rates at the present level in order to contain housing driven inflation.
New Zealand also suffers from a massive Current Account deficit which has ballooned to $13.7 billion or 8.9 percent of GDP in 2005. The net result of these developments is that the kiwi has seen a one way slide of more than 800 points since the beginning of February with today's price action recording a 150 point drop.
Although the country's economy is tiny (Manhattan has a larger GDP) some analysts wonder if New Zealand with its high interest rates, overheated housing market and enormous Current Account deficits will serve as microcosm of future problems in the US.
The greenback meanwhile suffered no such pain as yesterday's surprising 5.6% rise in February's Existing Home Sales fueled a rally that took the EUR/USD below the 1.2000 figure. The market's optimism stemmed from the fact that higher short term rates are having little negative impact on the housing market so far, raising speculation that the Fed may go to 5.25% money before pausing its rate hike campaign. The initial reaction however, may have been premature.
Existing Home Sales are a notorious lagging indicator with yesterday's numbers really representing January's transactions when unseasonably warm temperatures may have skewed the results. Today New Home Sales report, though far smaller in volume, may be a more accurate indicator of current housing demand.
If the New Home Sales confirm the upside surprise of yesterday's numbers, greenback bulls will have a much stronger case for an additional dollar rally and the pair may indeed test the 1.1900 level before the end of the day. On the other hand if New Home Sales report a slowdown the EUR/USD may turn back to the 1.2000 figure once again.
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Majors Quiet, Kiwi Dives
- Friday, March 24 - 2006 at 15:32
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The story of the night in the currency market comes from the land of the kiwi where the New Zealand dollar which has been under enormous pressure of late collapsed even further after the country reported the first contraction of its GDP in five years.
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Boris Schlossberg, Senior Currency Strategist, Daily FXFriday, March 24 - 2006 at 15:32 UAE local time (GMT+4)
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This article was updated on Sat Jun 09 2007.
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