New Zealand Dollar Extends Decline on Rate-Cut Expectations

By Candice Zachariahs

Jan. 20 (Bloomberg) -- The New Zealand dollar fell after a government report said consumer prices declined in the fourth quarter as fuel prices slumped, adding to signs the central bank will cut the benchmark interest rate to a record low next week.

The currency slid to 53.59 U.S. cents at 9:35 a.m. in Sydney from 54.20 cents just before Statistics New Zealand said the consumer prices index declined 0.5 percent from the third quarter. The Australian and New Zealand dollars also dropped for the first day in three after the European Commission lowered its forecast for the euro-area economy, raising concerns a global slowdown will worsen.

“This reinforces the theme that the Reserve Bank of New Zealand will cut rates when they meet,” said Danica Hampton, a strategist at Bank of New Zealand Ltd. in Wellington. “The global backdrop is very heavy. People are keen to sell growth- sensitive currencies like the kiwi dollar,” she said referring to the currency by its nickname.

Australia’s currency slid 1.6 percent to 66.67 U.S. cents from 67.76 cents late in Asia yesterday. The currency dropped 1.6 percent to 60.42 yen. New Zealand’s dollar dropped 2.2 percent to 48.60 yen from 49.67 in Asia yesterday.

RBNZ Governor Alan Bollard will cut the benchmark rate 100 basis points to 4 percent when the bank meets Jan. 29, according to the median forecast of eight economist surveyed by Bloomberg News. Traders raised bets that the bank will slash rates nearly 2 percentage points over the next 12 months to restore domestic demand, according to a Credit Suisse index based on overnight swaps trading.

Downside Risks

Risks to the New Zealand dollar are to the “downside,” said Hampton before the release of retail data tomorrow that economists expect to show sales slid 1.2 percent in November.

“Sentiment towards the kiwi dollar really turned last week,” Hampton said.

Standard & Poor’s revised the nation’s AA+ foreign-currency credit rating outlook to negative from stable on Jan. 13 citing concern over its current-account deficit and overseas debt.

Higher interest rates in New Zealand and Australia, compared with 0.1 percent in Japan and as low as zero percent in the U.S., are attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits. The benchmark rate in Australia is 4.25 percent.

European Slowdown

The Brussels-based European Commission said yesterday that the economy of the 16 countries sharing the euro will shrink 1.9 percent in 2009, revising a November estimate for growth of 0.1 percent. European Central Bank President Jean-Claude Trichet said yesterday economic prospects are “substantially” worse than the ECB predicted just last month.

Australia’s dollar also slipped as the price of oil, the nation’s fourth most-valuable commodity export, dropped below $34 a barrel in New York.

“There’s a more negative outlook globally and oil prices were also weaker,” said Tony Morriss, a senior markets strategist at Australia & New Zealand Banking Group Ltd. in Sydney. The Australian dollar is likely to fall toward 66.50 U.S. cents “with the risk that we move lower over the next few days,” he said.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net