Opinion: Kiwi suffers as super Yen surges

By BNZ Currency Strategist Danica Hampton The NZD/USD fell further last night, from above 0.5600 yesterday morning to nearly 0.5350 "“ its lowest level since April 2003. Escalating concern about a deep and prolonged global recession and risk aversion has sparked the carnage in currency markets. Our risk appetite index (which has a scale of 0-100%) has plunged to 4% - its lowest level since August 2002. Risk aversion has seen investors bail out of growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. NZD/JPY has fallen more than 20% over the past week, from around 64.00 to a 7-year low of below 49.50 last night. While the RBA has been visibly buying AUD and there is speculation the Bank of Japan is selling JPY, individual intervention efforts will not be enough to dislodge the global trends of a stronger USD and JPY. The G7 has expressed concern about recent JPY strength, but French Finance Minister Lagarde completely ruled out coordinated currency intervention. In the near-term, expect the fortunes of the NZD to remain tied to the global outlook and risk aversion. The Fed is expected to cut rates this week, and recent comments from ECB President Trichet suggest a European rate cut is likely in November. Nonetheless, with the world headed for recession, equity markets will likely remain under pressure and the heavy losses in Asian equities are chilling reminiscent of the Asian crisis a decade ago. And struggling emerging economies continue to seek out assistance from the IMF. While the outlook for the global economy remains dismal and risk aversion rife, expect the NZD to remain under pressure. For today, some headwinds are expected around 0.5600 (ahead of strong resistance at 0.5780-0.5800). Initial support is seen around 0.5350, but a break below this level will open up the downside towards 0.5200. Worries about a global recession and the melt-down in emerging economies continue to plague financial markets. Over the past few days, investors have been bailing out of riskier, growth sensitive assets in favour of more traditional markets and "˜safe-haven' investments. In currency markets, these risk aversion flows have supported the USD and JPY at the expense of most other currencies. Last night, GBP/USD fell to a 6-year low of 1.5283 and EUR/USD fell to a 2½-year low of 1.2335. The carnage in currency markets has not gone unnoticed by governments and officials. Solid demand for USD/JPY below 92.00 has fuelled speculation the Bank of Japan has been covertly intervening to support the JPY. The RBA has been visibly buying AUD over the electronic broker over the past two days. And the Bank of Korea cut its interest rate 75bps to 4.25%. Overnight, the G7 tried to reign in the surging JPY by expressing its concern about the "excessive volatility" and the "possible adverse implications for economic and financial stability". However, market participants doubt the G7 will back up its words will co-ordinated intervention. Confirming this sentiment, French Finance Minister Lagarde said the G7 would not be intervening to sell JPY, but noted they support the "possible intervention of Japanese authorities". While individual central bank intervention is unlikely to dislodge medium-term trends in currencies, it is giving market participants food for thought. Unlike EUR/USD and GBP/USD which both made fresh lows overnight, USD/JPY hasn't broken below the 13-year low of 90.90 reached on Friday. Admittedly, comments from ECB President Trichet, who said the ECB may cut rates at its next meeting (November 6) probably added to the downward pressure on EUR/USD. Looking ahead, currency sentiment will continue to be closely tied to the outlook for global growth and risk aversion. While market participants remain fearful about a deep and prolonged global recession, risk aversion and global de-leveraging flows will likely continue to support the USD and JPY. This week's economic data should help shape expectations. In the US, we have consumer confidence and Q3 GDP. While in the Eurozone, we see Germany's IFO for October and the European Commission's business and consumer confidence surveys. Along with the economic data, the Fed is widely expected to cut rates another 50bps to 1.00% at this week's meeting. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.