New Zealand released its 2013 Budget at 10am EDT yesterday, showing a larger degree of optimism as compared to before. Finance Minister Bill English announced that the Government will be able to see black figures in 2014/2015, balancing its budget with a slim $75 million NZD surplus. This is a huge contrast from Australia, who released its 2013 budget 2 days earlier, surprising investors with a planned deficit despite Treasurer Wayne Swan promising a balanced budget earlier on.
Kiwi dollar did not rally much higher despite the better than expected news. In fact, it is debatable whether a balanced budget is considered desirable to the market right now. Certainly a balanced budget is always welcomed, as it means that the country does not need to dip into its reserves which should be reserved for rainy days. However, it is clear that rainy days are here, and in fact a deficit budget which promote spending should be welcomed in order for New Zealand to grow just when RBNZ recently say that the drought will shave off 0.7% of GDP growth this year. Furthermore, New Zealand has been experiencing slower growth, growing by 4%, annually since 2008-2009 (about 0.79% per annum) compared to Australia’s 13% (2.47% annum).
Hence it is no surprise that price dipped after the budget announcement, only to find support along 0.8215 – the ceiling yesterday. Price continued to pull up higher during early Asian hours due to a pullback of USD, but selling resumed quickly when European traders came in. Price collapsed below the 0.818 swing low, and is now kept by the Descending Channel floor.
There could be some potential for price to rebound higher from here, but it is likely that 0.818 will now act as resistance , and failure to break the 0.818 level will reopen Channel bottom for retest and possibly breakout.
Daily Chart shows the importance of 0.818. However, before we call this one a breakout, we should ideally seek confirmation as Stochastic readings have reached into Oversold regions, with readings appearing to flatten rather than pointing lower. Should this level be broken, we could potentially see price going towards 0.805 which will be another significant support.
Moody’s have affirmed NZ’s triple A credit rating after the budget announcement, with S&P and Fitch both affirming their AA ratings. However, do not assume that this affirmation equates to higher NZD, nor is this an implicit nod that NZ economy is doing well. Case in point, Australia’s budget deficit has failed to trigger a decline in ratings, nor did its declining growth rates raised as concerns. The credit rating agencies are only interested in one thing – ability for country to honor their debt. And in this case, with a balanced budget, it is not surprising that they believe that New Zealand is in a good position to fulfill all its debt requirements, which is different from saying that NZ’s economy will be given an A grade. As such, do not buy into the budget optimism, and continue to look at USD strength and also New Zealand’s inherent weakness moving forward.
EUR/USD – Moves to One Month Low Below 1.29
AUD/USD – Settles Around 0.99
GBP/USD – Bounces Off Support at 1.52
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