NZD/USD: Kiwi Falls as Market Sentiment Deteriorates

The New Zealand dollar is presumed to continue losing ground opposite the US dollar as investors pare back risk on further signs of a slowing global economy. Last Friday, concerns about Spain and the US economy dampened market sentiment. Today, additional worries about the Chinese and the Japanese economy are deemed to weigh on sentiment further.

Last Friday, the markets were jittery ahead of an Oliver Wyman commissioned stress tests of Spain’s banking sector designed to lift doubts about the financial industry’s ability to absorb losses. According to the review, Spanish banks have a capital deficit of 59.3 Billion Euros, less than the previously estimated figure of 62 Billion Euros. With the road cleared for a recapitalization of its banks and an austerity budget in place, experts say that Spain is set to formally request a bailout from the ECB and the European authorities. Nonetheless, market jitters are still believed to haunt Spain as the markets are bracing for a possible downgrade of Spanish government debt to junk status. Moody’s Investors Service is due to release its decision after a review of the nation’s rating concluded last Friday, and analysts foresee that the outcome is unlikely to be positive. Spain’s credit rating currently sits just one notch above junk status, and any downgrade will likely have severe consequences as some investors cannot hold non-investment grade debt.

Meanwhile, falling external and internal demand continues to weigh on Chinese factories in yet another grim sign that the world’s second largest economy is slowing. Over the weekend, HSBC and Markit reported that China’s manufacturing sector contracted for the eleventh consecutive month in September as export orders declined at the fastest pace in 42 months and purchasing activity dipped for a fifth straight month. Confirming this is the release today of a government-backed Manufacturing PMI which showed that factory activity contracted for a second straight month in September. Although the index ticked up from 49.2 points to 49.8 points, the figure remains below the 50-point reading that separates expansion from contraction.

Falling export demand amid slowdowns in China and Europe is also taking its toll on Japanese manufacturers’ moods. The Bank of Japan reported that the Tankan Manufacturing Index dropped from -1 to -3 points in the third quarter to register its fourth consecutive negative reading. Exports have fallen for three months, plunging 22.9 percent in August to the European Union and 9.9 percent to China. Export growth is further threatened by a continuing row between Japan and China over islands in the East China Sea. With the world’s major economies feeling the strain, low risk appetites are seen to hurt the commodity-linked currencies such as the Kiwi. Hence, a short position is advised today.

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