Opinion: Kiwi plunges as panicked investors repatriate cash

By BNZ Currency Strategist Danica Hampton NZD/USD has plunged dramatically over the past 24 hours, from above 0.6600 yesterday morning to below 0.6200 last night "“ its lowest level since August 2006. The carnage in currency markets started yesterday afternoon. Asian equity markets skidded 4.00-6.00% and this triggered heavy selling of NZD/JPY and AUD/JPY from Japanese margin accounts. NZD/JPY supply dragged NZD/USD through stops around 0.6480 and soon had NZD/USD testing support at 0.6440. But the NZD liquidation continued as global growth concerns and fears about the health of financial sector saw heavy losses chalked up in European and US equity markets. The German DAX fell 7.07%, the FTSE fell 7.9% and at one point the S&P500 was down 8%. Another wave of NZD/JPY selling hit and the cross slipped from 67.00 to around 62.00 "“ its lowest level since December 2002 - and NZD/USD was knocked below 0.6200. While last night's moves in NZD/USD were fairly dramatic, they were not inconsistent with our medium-term view of NZD/USD. We expect the combination of a sharp slow-down in NZ growth, further RBNZ interest rates and deteriorating terms of trade to weigh on the local currency. Our forecasts have NZD/USD at 0.6200 by year-end and troughing around 0.6000 in the first half of the 2009. But as we've often warned, the risks are skewed in favour of the NZD falling faster and further than these forecasts. After the speed and magnitude of last night's drop in the NZD/USD, some consolidation would normally be expected. Dips below 0.6200 have attracted some demand from real-money accounts and support is eyed around the overnight low of 0.6170. Nonetheless, against a backdrop of slowing global growth and fragile risk appetite, we expect bounces in the NZD/USD to be limited. Initial resistance is seen around 0.6330-0.6350. Escalating fears about the global outlook and concern about the financial sector caused absolute carnage in currency markets last night. A dramatic slide in global equities, a melt-down in commodity prices and risk aversion saw investors rush to the relative safety of USD and JPY at the expense of most other currencies. Asian equity markets skidded 4.00-6.00% and European equity markets didn't fear much better. The DAX fell 7.07%, the FSTE fell 7.9% and at one point the S&P500 was down 8%. Fears about a slow-down in global growth also saw commodity prices slide. The CRB index fell 4.8% and crude oil prices slipped 6% to around US$89/barrel. Meantime, risk aversion saw investors flock to the relative safety of gold and government debt. Gold is up 4.1% at US$870/oz and US 2-year government bond yields slipped 20bps to 1.38%. Japanese margin accounts have been heavy sellers of JPY crosses over the past 24 hours. AUD/JPY has fallen about 13.5%, NZD/JPY has fallen about 10% and EUR/JPY has fallen about 6.1%. These risk aversion inspired trades saw USD/JPY sink from around 104.00 to around 100.25. Vague rumours of quasi-official demand and option related buying has seen USD/JPY stabilise ahead of 100.00. EUR/JPY had its biggest one day slide since its launch in 1999 amid risk aversion and escalating concern about the health of the European banking sector. French President Sarkozy issued a statement from the 27 member states of the European Union saying individual countries would do all they could to safeguard the financial system. Eurozone finance ministers are gathered in Luxembourg in an attempt to attack the crisis in unison. Steady EUR/JPY supply, combined with a generally firmer USD, saw EUR/USD slide from above 1.3650 to within a whisker of 1.3450. Looking ahead, the main focus will continue to be on how credit markets respond to the approved US banking bailout plan and the European pledge to prevent Eurozone bank failures. While the official measures should eventually shore up confidence in the troubled banking sector, providing a bit of a prop for credit markets and financial stocks, the recovery may take months. Meantime, muted risk appetite and fears about a global slow-down will likely lead to further repatriation of USD and JPY. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.