The New Zealand Dollar's Slump Deepens On Growth Downgrade

A pre-election finance update from the National Party government of New Zealand has helped to deepen the rout seen by the Kiwi dollar.

The Kiwi dollar slid across the board in London Wednesday, deepening an existing rout of the currency relative to many of its major rivals, after the New Zealand government cut its economic growth forecasts in a pre-election finance update.

New Zealand’s currency edged lower against others in the G10, a grouping that represents the world’s ten most advanced economies, where it has been the worst performer for the year to date.  

“The softer growth New Zealand has experienced in the six months to March flows through to a lower starting point in the 2017/2018 year,” says finance minister Steven Joyce in the Treasury's Pre-election Economic and Fiscal Update 2017.

The statement has left traders weighing the possible implications the government’s projections may have for interest rate policy at the Reserve Bank of New Zealand (RBNZ).

"The NZ’s government’s pre-election budget update saw it trim growth and Budget forecasts, which limits the ability for any party to make big spending promises ahead of the upcoming election. The downgrades were a surprise and so weighed on the NZD," says Velentin Marinov, Head of G10 FX Strategy at Credit Agricole.

Joyce forecast that the NZ economy grew by 2.6% during the year to June, down from an earlier 3.2% forecast, while growth for the year to June 2018 is expected to be 20 basis points lower than earlier projections, at 3.5%.

Over the four-year forecast period, New Zealand’s economic growth is now seen averaging 3%, rather than the 3.1% previously predicted.

Joyce offered a carrot to economy-watchers when he said that the NZ budget surplus grew by $2.1 billion for the year just ended, but in almost the same breath, he took it away again by announcing reduced Treasury forecasts for the surplus over the four years to June 2021.

“However Treasury expects the lower growth forecast to result in surpluses that are $1.8 billion lower over the next four years,” Joyce added.

The Kiwi dollar fell the most against the Japanese yen, dropping 1.12% to change hands at Jpy 79.00 early in the London session, while putting in its least-poor performance against Antipodean rival the Australian dollar.

Relative to the Australian dollar, the Kiwi was down around 0.51% at 0.9159 in early trading. The lesser decline may have been influenced, in part, by a Moody’s report that suggested Australia’s government may struggle to reign in its budget deficit during the year ahead, due to an uncertain outlook for the likely pace of economic growth in the Asia-Pacific country.

The New Zealand dollar to pound sterling exchange rate dropped 0.69% to 0.5641, reducing its year to date gain to just 0.54%.

Wednesday’s report comes a month out from a general election that will see the incumbent National Party, a conservative party, face off against left-of-center challengers, the Labour Party.

It also comes after the RBNZ has sat on hold, leaving its benchmark interest rate unchanged, for a total of five meetings after cutting it by 25 basis points to 1.75% in November 2016.

The November reduction was the seventh cut by the RBNZ since April 2015 when the commodity price rout that swept the globe from 2014 onward, made the earlier cash rate of 3.5% unsustainable.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.