By DailyFX – The story of the night in the currency market comes from the land of the kiwi where the New Zealand dollar which… … has been under enormous pressure of late collapsed even further after the country reported the first contraction of its GDP in five years.

New Zealand's Gross Domestic Product declined -0.1% from an expected increase of
0.2%. The country's 7.25% short term rates * the highest in the industrialized
world – are choking economic demand with many analysts now predicting the
possibility of a recession in 2006. However, RBNZ's arch-conservative governor
Allan Bollard has been adamant about maintaining rates at the present level in order
to contain housing driven inflation.

New Zealand also suffers from a massive Current Account deficit which has ballooned
to $13.7 billion or 8.9 percent of GDP in 2005. The net result of these developments
is that the kiwi has seen a one way slide of more than 800 points since the
beginning of February with today's price action recording a 150 point drop.
Although the country's economy is tiny (Manhattan has a larger GDP) some analysts
wonder if New Zealand with its high interest rates, overheated housing market and
enormous Current Account deficits will serve as microcosm of future problems in the
US.

The greenback meanwhile suffered no such pain as yesterday's surprising 5.6% rise in
February's Existing Home Sales fueled a rally that took the EUR/USD below the 1.2000
figure. The market's optimism stemmed from the fact that higher short term rates are
having little negative impact on the housing market so far, raising speculation that
the Fed may go to 5.25% money before pausing its rate hike campaign. The initial
reaction however, may have been premature. Existing Home Sales are a notorious
lagging indicator with yesterday's numbers really representing January's
transactions when unseasonably warm temperatures may have skewed the results. Today
New Home Sales report, though far smaller in volume, may be a more accurate
indicator of current housing demand. If the New Home Sales confirm the upside
surprise of yesterday's numbers, greenback bulls will have a much stronger case for
an additional dollar rally and the pair may indeed test the 1.1900 level before the
end of the day. On the other hand if New Home Sales report a slowdown the EUR/USD
may turn back to the 1.2000 figure once again.