N.Z. Dollar May Slide 20% to Record Low on Rate Cuts, RBC Says

By Candice Zachariahs

Feb. 2 (Bloomberg) -- The New Zealand dollar may plunge more than 20 percent to a record low as the central bank cuts interest rates and the global slowdown saps investor appetite for riskier assets, RBC Capital Markets said.

The currency may weaken to an all-time low of 38.98 cents in coming months, said Sue Trinh, a senior currency strategist at RBC Capital Markets, a unit of Royal Bank of Canada. Reserve Bank of New Zealand Governor Alan Bollard lowered the official cash rate to 3.5 percent last week, the lowest ever, and said there is room for further reductions to steer the economy out of a deepening recession.

“A move to all-time lows of 38.98 cents in coming months can no longer be ruled out,” Sydney-based Trinh said, confirming the contents of a research note today. “The New Zealand dollar is most vulnerable to dwindling appetite from offshore investors and the risk of persistent capital outflow in the coming year will likely see our 43-cent target by mid-2009 achieved earlier.”

New Zealand’s dollar fell 0.1 percent to 50.85 U.S. cents as of 1:10 p.m. in Wellington, from late in New York last week. The currency traded at 39 cents in October 2000, the lowest since at least 1971, according to Bloomberg News records.

The central bank’s 4.75 percentage points of rate cuts since July has lowered the extra yield offered by the nation’s three-year bonds over similar-maturity Japanese debt to 2.85 percent last week, the narrowest since 1994.

The currency will extend January’s 12 percent loss against the U.S. currency as NZ$15 billion ($7.63 billion) of New Zealand dollar bonds issued in Japan and through global issues, so-called uridashi and eurokiwis, mature this year, Trinh wrote in the note. “We anticipate the largest net negative issuance in history.”

‘Bearish Impact”

International investors hold 73.6 percent of the New Zealand government bond market, according to RBC Capital. “For every 0.1 percentage point decline in foreign ownership, there will be a disproportionately bearish impact on the New Zealand dollar,” Trinh wrote.

Standard & Poor’s lowered its foreign-currency credit- rating outlook for the nation on Jan. 13, citing concern the nation’s current-account deficit and overseas debt will curb growth and investment.

Interest rates in New Zealand will fall to a low of 2.5 percent by the second quarter, RBC Capital said. The benchmark rate is 0.1 percent in Japan and as low as zero percent in the U.S., a record low.

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