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Kiwi Under Pressure As Job Creation Slows; China Debts

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New Zealand employers hired workers at a slower pace than economists had forecasted in the past three months through June, adding to signs that economic growth is slowing down in response to higher borrowing costs. Ordinary time wages for non-government workers rose 0.6% from the first quarter.

Employment increased 0.4%, or by 10,000 jobs, from the first quarter when it grew 0.9%. The jobless rate fell to 5.6%, the lowest since the first quarter of 2009, as fewer people were looking for job opportunities. Slowing growth in jobs and a drop in business confidence suggest restrained inflation pressure in coming quarters.

Reserve Bank Governor Graeme Wheeler signalled last month he would take time to assess how the economy is responding after he raised interest rates four times between March and July.

In China, low momentum in the stock market does not support for the strong Aussie and Kiwi, which might be under pressure in the near term. China’s stocks fell the most in a month, led by financial and energy companies; on speculation the benchmark index’s world-beating rally was excessive relative to earnings prospect. The Shanghai Composite Index slipped more than 0.8% in the morning trading hour, poised for the biggest retreat since beginning of July. The Shanghai index, which has rebounded 11% from this year’s low, will probably end its rally within days, as the previous catalyst may not be sustainable. Seesaw pattern in the past years also encourage the traders to take profit if there was any.

Without further broad support from the Chinese officials, we could see another round of the default tantrum to reach. The small companies that dominate China’s private market for high-yield bonds face rising default risks as their debt obligations soar to a record and economic growth slows to the lowest in more than two decades.

Privately issued notes totalling 6.2 billion Yuan will come in the next quarter, the most since authorities first allowed such offerings from small to medium-sized borrowers in 2012. Premier Li Keqiang has sought to expand financing for small companies, but whether it will be effective remains unknown. The current risks exposed in the private-bond market are probably a prelude to a storm. There’s been improvement in only some large sectors of the economy, not in a broad SME base.

China started its private junk bond market in June 2012 to give small companies a way of raising funds outside the network. It might also be outside the shadow banks.Borrowers sell the notes directly to institutional investors in the market, unlike with publicly auctioned securities. Smaller businesses seeking to sell debt as part of the trial program didn’t have to meet net asset or profit requirements.

Concern defaults may have heightened as data indicate the government’s stimulus measures are failing to gain traction outside of manufacturing. China’s service industries stagnated in July as a private index fell to a record low according to the data yesterday. Credit-default swaps insuring the nation’s debt against non-payment climbed five basis points this quarter to more than 80 basis points.

As long as another round of the default fears arises in China, there could be a great opportunity to sell the Aussie and Kiwi since the values are in the higher range of the year. Moreover, Aussie could be more vulnerable than the Kiwi.

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