KEY POINTS:
The New Zealand dollar's fall in the aftermath of Thursday's 150 basis point cut in official interest rates steepened yesterday with the currency dropping below the US51c mark for the first time in six years.
But ANZ chief economist Cameron Bagrie says this is but a taste of
things to come and doesn't rule out an eventual move below US40c.
The kiwi had been trading above US52.30c before Thursday's rate call but began declining afterward, with further downward impetus coming from bad news about the Crown accounts and the trade deficit.
Yesterday, the worst building consent figures in 20 years and a speech by Reserve Bank Governor Alan Bollard indicating yet more rate cuts were likely dragged the kiwi even lower. From its US51.44c open yesterday it fell to US50.78c, its weakest point against the greenback since late 2002 before recovering a little to close at US50.89c.
"I think it's going a lot lower," Bagrie told the Herald yesterday.
"Everybody is fixated with interest rates at the moment and have forgotten about the currency, I think it's going to be the bigger story here."
Bagrie said the currency market was now trading more off relative economic fundamentals than yield differentials at present
"The currency has got to be far lower because we have a current account deficit of 8.5 per cent of GDP."
A big fall was necessary to address that and pave the way for the country to earn and pay its own way.
"I think we're going to be very surprised how far it falls."
Until recently most currency watchers generally picked the kiwi to trough around the US45c mark.
"That's above my central case at the moment," said Bagrie. "Our central case at the moment is it goes to US41c."
A move below US40c was not out of the question. "At this juncture I wouldn't rule anything out.
"This is a big global financial crisis, countries that are very reliant on foreign capital are going to get penalised."
While the US had some of the same problems as New Zealand, its sheer scale meant its currency was not as vulnerable.
"People have to have a big proportion of their portfolio in America, they don't have to have any in New Zealand."
BNZ Capital currency strategist Danica Hampton said comments by Finance Minister Bill English and Bollard knocked the currency yesterday.
"It is also really part of the global backdrop. The US dollar is firmer against a broad range of currencies so when the kiwi hit the low the euro
was low and the aussie was low too," she said.
As a result against the Australian dollar the NZ dollar was little changed at A78.99c from A78.66c yesterday.
It was down against the Japanese yen at 45.48 from 46.19 and lost ground against the British pound to 35.58p from 36.02p.
The trade weighted index stood at 51.47 from 51.82 yesterday.
- NZPA
