Long standing concerns about the size and sustainability of New Zealand’s current account deficit were rekindled by the worse-than-expected data.

“The current account deficit is 9.3 percent of GDP, much too high for the market’s liking, particularly as attracting capital flows is becoming more difficult,” said Ashley Davies, currency strategist at UBS in Singapore.

The kiwi fell immediately following the release of the data, and later dropped further on comments by ratings agency Standard and Poor’s that the deficit remained a risk for New Zealand’s sovereign rating.

Investors had been expecting the current account deficit to worsen but were taken aback when the annual deficit hit a record NZ$14.54 billion ($9.03 billion) driven by poor trade performance and foreign investors repatriating hefty profits from their New Zealand assets.

Economists generally agreed that the deficit had a little further to go before it peaked, but ANZ-National Bank’s head of market economics Cameron Bagrie doubted it would be the determining factor in any further weakness in the kiwi.

“To get the second big drive lower in the New Zealand dollar from here I think is still yield-dependent, as opposed to being dictated by an imbalances theme,” Bagrie said.

Attention now turns to Friday’s first quarter growth data, with a soft number likely to be a catalyst for another lurch lower in the kiwi.

SOURCE: REUTERS

Expectations of an imminent Fed pause contrast with predictions of tighter monetary policy from the European Central Bank (ECB) and the Bank of Japan.

This morning’s news of a fall in German consumer prices in May did little to alter expectations that the ECB is on track to raise its key refi rate another quarter point to 2.75 pct at its rate-setting meeting next week.

Official figures showed the annual CPI in Germany, the euro zone’s largest economy, rising by 1.9 pct in May, lower than the 2.0 pct recorded in April.

Meanwhile, US inflation data Friday afternoon added very little to the US rate debate. Core inflation — as measured by the personal consumption expenditure price index, which excludes food and energy — rose 0.2 pct in April, as expected, after a 0.3 pct gain in March. Core inflation rose 2.1 pct in the past 12 months, the fastest gain since March 2005.

Core inflation is now running slightly above the Fed’s informal ‘comfort zone’ of 1-2 pct. But the Fed is more concerned about what inflation will do than what it has done.

The PCE reading ‘is fairly neutral’, said Ronald Simpson, currency strategist at research firm Action Economics.

‘This one piece of data is not going to determine what the Fed does at its next meeting,’ he added.

The market will be closely monitoring this week’s FOMC minutes from the May 10 meeting, along with US payrolls on Friday as the up and coming events that may provide some guidance about whether the Fed will raise rates in June.

SOURCE: AFX