S&P lowered its outlook for New Zealand’s rating to negative from stable, citing the country’s rising current account deficit and worsening fiscal outlook, though confirmed a stable outlook for the local currency rating.
The Kiwi was sold off heavily in the wake of the news, sinking 3.5 per cent against the US dollar to US$0.55, and breaking through the psychologically important Y50 level against the Japanese yen, at one point losing 4 per cent to touch an intraday low of Y49.20.
Analysts said the Kiwi was further hurt by deteriorating demand for commodities amid the global economic downturn, and news that business confidence in the country had hit a 34-year low, according to the New Zealand Institute of Economic Research’s quarterly survey.
The dismal survey results increased speculation that New Zealand’s national bank would cut interest rates by at least 100 basis points on January 29.
David Woo at Barclays Capital said the Kiwi could have further to fall: “Waning investor optimism, declining equity and commodity markets and a very weak reading in business confidence are likely to weigh significantly on the NZD, while the S&P news adds to the downward pressure.”
On Monday, S&P cut its outlook for Spain’s foreign currency debt to negative from stable. Analysts warned this might not only damage the market for Spanish bonds, but would also put pressure on the euro. The eurozone currency extended two sessions of losses against the dollar to slide 0.4 per cent at $1.33, and also fell 0.6 per cent against the yen at Y118.44.
Steve Barrow at Standard Bank said: “We definitely think that we will hear more and more talk about downgrades within the periphery eurozone bond markets this year and, who knows, maybe the ratings agencies will actually get their knives out and cut. Hence, this story is set to get bigger, with the implication that it eventually starts to unsettle the euro.”
Elsewhere, a broad based return to risk aversion in the markets saw the safe haven yen stage gains against all the major currency crosses. Against the dollar, the yen extended Monday’s move below the significant Y90 level, slipping a further 0.2 per cent to Y89.05. The yen also jumped 1.8 per cent against the high yielding Australian dollar, to Y59.69, and added 0.5 per cent against the Swiss franc to Y79.68.
Sterling was weaker across the board after the release of worse than expected retail sales and housing data, and an exceptionally grim business survey from the British Chamber of Commerce. The pound fell 1.1 per cent against the euro to £0.9115, and was 1.5 per cent lower against the dollar at $1.4595».
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