KEY POINTS:
Yesterday's quarterly employment data caught the markets off guard, currency strategists say.
The drop in the number of people employed caused the New Zealand dollar to slump, closing at US77.28c,
Sue Trinh, senior currency strategist with Royal Bank of Scotland Capital Markets in Sydney, said the 1.3 per cent drop in seasonally adjusted employment during the March quarter was a surprise. "I don't think anyone was looking for the number to be as bad as what it was."
She said the kiwi fell from around US78.25c to as low as US77.11c, and also lost ground against the Australian currency with the release of stronger-than-expected Australian jobs data. The kiwi fell 1.1c to close at A82.16c. .
Westpac market strategist Michael Gordon said there was an even more dramatic reaction in the interest rate markets, where the two-year swap rate was down more than 20 basis points. "You generally only see those moves on particularly significant days, more like OCR review dates." He said globally markets were pricing in more easing for New Zealand than any of the other major economies, and that suggested the kiwi was likely to continue underperforming versus a basket of currencies.
Trinh agreed the kiwi's path now was downwards.
"We are still forecasting US69c by the end of this year, and we're increasingly confident of that as we see just the raft of very weak domestic data out of New Zealand," she said.
"First quarter retail sales [data] next week is likely to be yet another nail."
Both strategists said the markets would now be looking to the Reserve Bank to ease interest rates by the third quarter.
"I would expect that their June monetary policy statement is likely to pave the way for the rate cuts that we expect to now occur in around about September," Trinh said.
"Just how quickly it [economic data] has turned around has been quite surprising indeed, certainly a lot faster than what the RBNZ had in its own data as well."
On the sharemarket the reaction to the jobs data was less pointed, and mixed.
After a weak opening, the NZX-50 finished 28.78 points higher at 3625.6.
Grant Williamson of sharebroker Hamilton Hindin Greene said that had more to do with a rally on the Australian market.
However, he said reaction to the employment number was a two-sided story. While the falling dollar was good for exporters, it wasn't good news for retailers as it would push up petrol prices and thereby reduce consumers' discretionary income.
Retail stocks were off yesterday, with Postie Plus losing 3c to close at 46c, and Michael Hill down 4c to 85c. The Warehouse dropped 14c to $5.50. Brokers also attributed the negative sentiment to Briscoe's warning on Wednesday of a 50 per cent drop in first half profits.
"I think that any companies that are related to the domestic economy are likely to come under a wee bit of pressure, whereas those that have more of the international flavour to them should come in for pretty good support.
"It's not a pretty picture but it might just force the hand of the Reserve Bank earlier than expected," Williamson said.
Stephen Wright of sharebroker ASB Securities agreed. "On one hand it's a good thing for interest rates, but on the other hand it's of course perceived that the economy may be slowing much more quickly than previously thought."
Chain reaction
* The New Zealand dollar slumped to US77.28c yesterday after a 1.3 per cent drop in employment in the March quarter
* The data also caused a dramatic reaction on the money markets, with the two-year swap rate falling around 20 basis points
* Reaction on the sharemarket was more muted, the NZX-50 closing up 0.79 per cent at 3625.6.
