New Zealand: Kiwi dollar losing its high yield luster

The New Zealand dollar has taken a hit this year, driven lower by narrowing global interest rate differentials and bearish sentiment regarding the New Zealand economy. The New Zealand dollar/U.S. dollar rate (NZD/USD) has plunged from a high around 0.7000 in mid-January to a late- June low around 0.5927.

Analysts point to New Zealand’s huge current account deficit, which recently hit 10.5 percent of GDP, as a drag on the country’s economy and currency (the “kiwi”), and a prominent factor driving the currency sharply lower in the early months of 2006.

“The current account deficit was clearly unsustainable and it was only a matter of time before the kiwi suffered a correction,” says Glenn Levine, economist at Moody’s Economy.com.

This factor, along with narrowing interest-rate differentials vs. Europe, Japan, and the U.S., as well asslowing domestic growth, triggered a massive selling of kiwi dollars during the first three months of the year.

“Growth expectations have dropped dramatically because of higher rates,” notes Rhonda Staskow, regional director FX Americas at Thomson Financial-IFR Markets. New Zealand’s cash rate currently stands at 7.25 percent, the level it has been at since December 2005. Analysts say the high short-term rates are finally impacting the economy in a negative fashion.