Kiwi Kneecapped By Downgrade

Kiwi Kneecapped By Downgrade

The kiwi was kneecapped in midday Asian trade after Fitch ratings downgraded its outlook on the nation’s economy noting that it was concerned about the outlook for growth and the large current account deficit. Fitch however reaffirmed its AA+ – its second highest level – on New Zealand’s foreign currency rating.

Ironically enough the downgrade came after a series of improving fundamental data fromthe region including today's rise in New Zealand BusinessManufacturing PMI data to 46.2 from43.1 the period prior. Nevertheless, Fitch expressed concern about the country’s current account deficit position which is presently running at 8% of GDP and warned that the country could fall into a “low growth trap.”

The downgrade caught many investors off guard and the unit quickly tumbled 50 points in the aftermath of the news to trade a full penny below its New York close of 6500. Given the fact that New Zealand's growth is highly depended on Chinese demand which showed a healthy rebound in Q2 as GDP expanded to 7.9%, it is a bit puzzling as to why Fitch chose to single out the kiwi economy at this particular time. Perhaps the rating agency expects global growth to slow in the second half of the year and under that scenario the pressure of the current account deficit would begin to weigh heavily on the country's finances.

Irrespective of the reasons tonight’s news put a major damper on the kiwi rally and the unit could see further selling if risk aversion flows accelerate as the day progresses. The downgrade has cast doubt in investor’s minds regarding New Zealand’s economic prospects inH2 of 2009, but ultimately the kiwi remains a proxy on Chinese growth and if today’s positive trends in Chinese GDP, Industrial Production and Retail Sales continue into the second half of the year, any dip in the currency will turn out to be a buying opportunity on a longer term basis.

ENDS

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