Opinion: Kiwi$ world's worst performing currency overnight as global growth fears re-emerge

By Mike Jones The NZD/USD has been the worst performing currency over the past 24 hours. From around 0.7450 this time yesterday, NZD/USD has slipped around 1.5 cents to 0.7300. Cracks in the NZD's armour first appeared yesterday afternoon after strong Japanese NZD selling at the Tokyo fix. NZD/JPY slipped from above 66.50 to nearly 65.50, dragging the NZD/USD below 0.7400 for the first time this week. A reassessment of rate hike chances from the RBA and RBNZ also weighed on the AUD and NZD yesterday. Following the less hawkish RBA minutes earlier this week, Australian markets have pared back the extent of tightening expected from the RBA. With local markets content to follow the Aussie lead, local 2-year swap rates fell 12bps yesterday reducing support for the NZD. Overnight, losses in the NZD continued. Despite gaining relatively little traction locally, comments from opposition leader Goff that the RBNZ policy targets "are not well designed to produce a stable and competitive exchange rate" were noted as reducing offshore NZD demand. A NZ Treasury report suggesting a "front loading" of fiscal policy could take the pressure of the NZD also weighed. A poor night in global equity markets certainly didn't help sentiment towards the ailing NZD. Global equity indices fell between 1.3-2% as fears about the strength of the global outlook returned to the fore. A German government advisor warned that Germany could face a double-dip recession, while figures detailing the woeful state of the UK's public finances highlighted the fragility of the outlook. As a result, risk appetite was pared back aggressively and "˜growth sensitive' currencies like NZD and AUD were sold in favour of the relative "˜safe-haven' of USD and JPY. Our risk appetite index has fallen to 51% from above 55% earlier in the week. Strong interest to sell NZD was noted from leveraged and speculative accounts, and NZD/USD eventually reached 0.7300. For today, reduced appetite for risk and the more cautious mood across global equity markets is expected to limit NZD/USD gains to the 0.7400 region. Dips towards 0.7290 are expected to attract solid buying interest. The USD strengthened overnight as sharp falls in equity markets and fears about the global outlook saw risk aversion spike higher. Over the past few days, patches of weakness in economic data have seen fears over the strength and durability of the economic recovery return. Fears were compounded overnight by some sharp falls in equity markets. The S&P500 is down about 1.5%, driven in part by Bank of America's growth downgrade of the Semiconductor industry. This was despite the slightly stronger-than-expected Philadelphia Fed index (16.7 vs. 12.2 expected). The DAX fell nearly 1.5% amid a warning from a senior advisor to the German government that Germany could face a double-dip recession as government stimulus is withdrawn. The OECD also said that the tepid recovery in the global economy means "close-to-zero interest rates are appropriate in most OECD countries until the latter half of 2010". The VIX index of risk aversion spiked from around 22% to above 24% as global growth concerns took hold. As a result, commodity prices fell from their highs and "˜growth sensitive' currencies were shunned in favour of "˜safe-haven' currencies like USD and JPY. USD/JPY fell from 89.30 to nearly 88.60. Meanwhile, the firming USD saw EUR/USD slip from above 1.4950 to below 1.4900 amid reports of heavy selling by Asian sovereign names. The GBP was a little heavy following more woeful public finance figures. Net public borrowing in October came in at a whopping £11.4b, easily outstripping the £7b forecast. UK retail sales weren't inspiring either, rising 0.4%m/m in October against expectations of 0.5%. Against this backdrop, GBP/USD washed off around a cent overnight, to around 1.6650 currently. "˜Commodity currencies' like CAD, AUD, and NZD were hit particularly hard by the reassessment of risk appetite and easing in commodity prices. Oil prices declined nearly 2%, while the CRB index (a broad measure of commodity prices) is currently down around 1%. A paring back of central bank rate hike expectations in Australia and NZ also weighed on their currencies. For today, the backdrop of heightened uncertainty about the global outlook is expected to keep the USD index supported on dips towards 75.00. Nevertheless, with risk appetite still on a generally improving trend and Fed rhetoric suggestive of accommodative policy remaining in place for some time, we expect the weakening USD trend to resume in coming sessions. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.