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Economists see rocky road for New Zealand dollar

WELLINGTON: Economists on Sunday warned of a rocky ride for the New Zealand dollar after it plunged more than two U.S. cents to a 17-month low on Friday.

The Kiwi, belted around by a huge trade deficit at home and a resurgent U.S. dollar, touched bottom at $0.4839 in late U.S. trade on Friday before a late bounce to close at $0.4930.

Strong U.S. fourth-quarter growth data drove the U.S. dollar up against most currencies and dealers said this triggered stop-loss selling in the New Zealand and Australian dollars.

The Aussie sank to a nine-month low of around $0.6225, before ending the week on $0.6345.

However, the slide in the Kiwi started hours before its bigger neighbour, due to surging imports that delivered a NZ$1.1 billion ($548 million) trade deficit in December -- almost twice the average market expectation.

Analysts saw the latest slide in the Kiwi as overblown because of technical selling. But they warned the previously widespread market belief that the Kiwi was beginning an upward track on higher commodity prices was now not so certain.

"It's a pretty nervous market. I guess the soft tone is likely to continue," ANZ Bank's chief New Zealand economist, Bernard Hodgetts, told Reuters.

The next set of trade data in a few weeks would be crucial as investors tried to gauge how much worse the trade balance and current account would get, Hodgetts said.

"One can't help but suspect that there's still that downside to the trade balance as we go through 2000 -- we've never really failed to be surprised at just how strong those imports are running."

Deutsche Bank chief economist, Ulf Schoefisch, forecasts a current account deficit ballooning to 8.1 percent in the December 1999 year, from 6.5 percent in the year to September.

"The longer this lacklustre performance continues the more people will lose confidence in this currency," he warned.

"If you look at the current account deficit, fair value from a pure trade balance perspective is probably lower but you then have to overlay that with interest rate differentials."

On January 19, the Reserve Bank of New Zealand (RBNZ) raised its official cash rate 25 basis points to 5.25 percent -- citing inflation fears in a growing economy -- but monetary conditions have since weakened because of the Kiwi's retreat.

Prior to Friday's trade data most in the New Zealand market expected a further 25 bp rise by the RBNZ in March.

Now there is a growing feeling that a 50 bp rise may be on the way as the central bank is forced to take a more aggressive stand to boost the Kiwi, or at least compensate for its weakness.

"If it languishes like this then you must be back to the 50 (point rise)," said Warburg Dillon Read economist Robin Clements.

Added Schoefisch: "It's going to be a rocky road I think.

"A weak currency will cause all sorts of problems -- given that there are natural limitations to how much interest rates can be raised to compensate for the weak currency. The bank will be very concerned about this development."

Clements was more positive, suggesting that higher interest rates would curb domestic price pressures while a lower currency would boost exports and help repair the trade balance.

A lower Kiwi can only help New Zealand's largely agricultural export sales. Volumes are rising but prices have been sluggish.

While world commodity prices are firming, the recovery is lead by minerals rather than farm products, analysts said.

Australia's exports are much more minerals-based and this may see the Kiwi decline to 75 Australian cents over the next few months from its current level around A$0.7750, local ASB Bank warned.-Reuters