New Zealand’s Unemployment Skyrockets to a 13-Year High!

A few days ago the Kiwi bulls had mini heart attacks when New Zealand printed its quarterly employment numbers. According to the Household Labor Force Survey, employment fell by 0.4% from July to September, which translates to a net 8,000 jobs lost.

The job losses then led to a jump in the unemployment rate. Unemployment in New Zealand is at 7.3% of the working population for Q3 2012. That’s a heck of a lot higher than the revised 6.8% figure for Q2 2012 and the 6.7% rate that market geeks were expecting!

Looking deeper into the report, we see that the increase by 7,000 workers in part-time employment was offset by the 13,000 drop in full-time employment. On top of that, the total hours worked also fell 0.8% from the second quarter and is 2% lower from a year earlier. The only silver lining is that labor participation rate stayed steady at 68.4% in the quarter as analysts have expected, indicating that people aren’t giving up hope in looking for jobs.

Unemployment is one of the most closely-watched economic indicators in New Zealand. It is especially interesting now that the economy recovers from the series of earthquakes in Christchurch. Apparently, employers are favoring part-time workers and casual staff over full-time workers while waiting for economic activity to pick up.

New Zealand’s strong currency isn’t helping the economy either. The manufacturing industry, for example, showed the weakest hiring since June 2010 as manufacturers are affected by the strong Kiwi. With the New Zealand dollar up by 4.5% against the Greenback so far this year, industries especially vulnerable to the strong Kiwi are being forced to lay off workers in an effort to cut back on expenses.

Consequently, the currency dropped like a rock following the report. NZD/USD fell by around 80 pips within the first 15-minutes of the release!

NZD/USD Reaction to New Zealand's Unemployment Rate

The Kiwi’s price action reflects the question on everyone’s mind now: “Will the RBNZ cut rates in December?” Expectations for RBNZ Governor Graeme Wheeler to announce a rate cut next month have increased to 22% from 12% after the employment report was released.

If analysts are right, a rate cut in December would be the first in more than a year. In September, the central bank’s head honcho still seemed confident with keeping the official cash rate at 2.5%, citing low inflationary pressures.

The last time the central bank slashed rates was in March 2011. Then-governor Alan Bollard announced a 50-basis point cut from 3.00% to 2.50% when most market participants estimated that a reduction to 2.75% would be enough to prop up the economy following the Christchurch earthquake.

Before you get too excited though, you should know that Wheeler isn’t a big fan of rate cuts. Talking to the parliamentary committee early this week, he acknowledged the Kiwi’s strength, saying that it’s an “issue of concern.” However, he didn’t think that slashing borrowing costs would be enough to weaken it significantly.

Take note though, that he made the remarks prior to the release of the employment report. Will the horrid unemployment rate be enough to change his mind about rate cuts?

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