By Mike Jones The NZD has been the weakest performing currency over the past 24 hours. In fact, NZD/USD tumbled to a 5-month low of nearly 0.6870. Yesterday's HLFS revealed a spike in NZ's unemployment rate to 7.3% in Q4, from 6.5% a quarter earlier. It was the highest reading since June 1999. The extent of the move caught everyone by surprise, most notably the RBNZ who were looking for an unemployment rate of just 6.6%, and a peak of only 6.7%. All up, the data suggests more spare capacity and, hence, less wage pressure than the Bank might have anticipated, ensuring it won't be in any hurry to hike interest rates. As such, markets quickly backed off the April hike they had previously favoured, sending both NZD/USD and NZD/AUD down nearly ½ cent. Strong demand from speculative and leveraged accounts to sell NZD/AUD then dragged the NZD/USD lower still, before it eventually found support around the familiar 0.6970 level.

But the NZD's woes didn't end there. Overnight, renewed fears over the fiscal health of Portugal and Spain sent markets into a tailspin. Risk appetite tumbled, taking a heavy toll on equities and commodity prices. Our index of risk appetite slumped from 56% to 48%. Global equity indices are down 2.0-2.5% and the CRB index (a broad measure of global commodity prices) has fallen around 2.5%. Against this backdrop, macro and real money accounts exited positions in growth-sensitive currencies like NZD and rushed back into the "˜safe-haven' of the USD and JPY. NZD/JPY plunged from around 63.50 to nearly 61.00 (having started yesterday around 64.50), and NZD/USD was dragged below 0.6890. Looking ahead, NZD/USD is expected to remain heavy in the short-term. Both technical and momentum factors are now conspiring against NZD/USD which should ensure bounces towards 0.6990 are met with selling interests. Near-term support is eyed around 0.6830. The USD and JPY were the strongest performing currencies overnight as fears over sovereign solvency continue to grip markets. Renewed concerns about the health of European sovereigns saw equity markets pummelled overnight. The DAX and the FTSE tumbled 2.2% and 2.5% respectively, while the S&P500 is down around 2.5%. A surprise drop in December German factory orders (-2.3%m/m vs. 0.2% expected) and higher-than-expected US jobless claims (480,000 vs. 455,000 expected) only added to the malaise. Following the EU's endorsement of Greece's deficit cutting plans, market focus quickly shifted to other troubled sovereign states. No prizes for guessing who they were. 10-year Portuguese bond spreads widened 30bps to 175bps over German Bunds, amid mounting political tensions over cutbacks in regional spending. A Spanish government back-down on pension reform added to deficit concerns and S&P said it expected to downgrade some Spanish regions' ratings in 2010. Spain's successful sale of €2.5b worth of 3-year government bonds seemed to do little to allay market fears. The VIX index (a common proxy for risk aversion) rose to the highest level this week, around 25.3%. Against a backdrop of heightened risk aversion and equity market weakness, investors once again sought out the relative "˜safe-haven' of the USD and JPY. Indeed, USD/JPY tumbled from 91.00 to below 89.00 "“ the lowest level this year. Mounting fears over Portugal and Spain also took a heavy toll on EUR. EUR/USD fell from 1.3900 to a 7-month low around 1.3750. Compared to the carnage elsewhere, central bank policy announcements from the Bank of England and the ECB were relatively uneventful. As expected, the BoE kept its policy rate unchanged at 0.5% and took a pause in their £200billion asset purchase scheme. Given "sluggish" UK growth, the BoE seemed to leave the door open for further asset purchases down the track should the economic recovery stumble. Still, GBP enjoyed a brief relief rally after the statement, given nagging fears the BoE may have extended quantitative easing. The ECB left rates on hold at 1%, also as expected, with ECB President Trichet noting "current rates remain appropriate". Looking ahead, the markets' focus is firmly on US non-farm payrolls data tonight. A 15,000 gain in employment is expected. Given this, and the fragile global backdrop, we suspect the USD index will remain well supported on any dips towards 79.40 in the short-term. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.