Opinion: Kiwi on a Credit Crunch roller coaster

Opinion: Kiwi on a Credit Crunch roller coaster
BNZ Currency Strategist Danica HamptonBy BNZ Currency Strategist Danica Hampton It's been another roller-coaster night for the NZD/USD. Despite the Fed announcing yesterday that it would step up with US$85b and purchase 80% of AIG, investors are extremely worried that the plague affecting Lehmans, Merrill Lynch and AIG will spill across into other financial institutions. Relentless selling of financial stocks saw the DAX skid 1.75%, the FTSE slide 2.25% and US equities fall 4% across the board. The terrible performance of equity markets prompted "flight to quality" flows into safe-haven assets like gold and government debt. Gold prices surged more than 10%, US T-bill yields plunged to practically zero and US 2-year government bond yields dropped 15bps to 1.655%. Escalating fear about the fragility of the financial sector and reduced yield support took a heavy toll on the USD last night. Against a generally weaker USD and firmer gold prices, EUR/USD surged from around 1.4100 to above 1.4350 and NZD/USD was dragged up from below 0.6550 to above 0.6680. While USD weakness was the dominant theme last night, escalating risk aversion and concern the problems in the US financial sector will spill across into global issues also took a toll on risk sensitive currencies like NZD/JPY. Selling of NZD/JPY helped knock NZD/USD off its highs. The countervailing forces of a weaker USD and risk aversion-inspired selling of NZD/JPY have the potential to keep NZD/USD range bound in the near-term. While a generally weaker USD will likely provide some support for NZD/USD, with NZ teetering on the brink of recession and global investor confidence still fragile, we expect sellers to emerge on bounces towards 0.6660-0.6680. Initial support is seen around 0.6500 and it will take a break below last week's 0.6440 low to suggest the downtrend is gaining traction. The USD skidded against most of the major currencies last night, weighed down by relentless selling of US equities and "flight to quality" flows into safe-haven assets like gold and government bonds. Global equity markets took another hit last night thanks to relentless selling of financial stocks. Despite the Fed announcing yesterday that it would stump up US$85b and purchase 80% of AIG, investors are extremely worried that the plague affecting Lehmans, Merrill Lynch and AIG will spill across into other financial institutions. Rumours that Lloyds may merge with HBOS set the scene for selling financial stocks during the London session and the FTSE finished down 2.25%. In the US, the SEC (Securities Exchange Commission) suspended the "short selling" of all stocks (effective Thursday). Meantime, Morgan Stanley and Goldman Sachs shares took a hammering and the credit default swaps blew out. The 5-year CDS on Morgan Stanley widened 231bps to 727bps (Lehmans CDS spiked to 706bps on Friday before its bankruptcy announcement) and Goldman Sachs 5-year CDS widened 99bps to 443bps. US equity indices are down 2.00-3.00% across the board. The abysmal performance of US equities saw investors rush to the relative safety of assets like gold and government securities. Gold prices surged more than 10% last night, from around US$780 to US$860/oz "“ the largest one-day rise in USD terms since 1980. The yield on 3-month US Treasury bills dropped to an unfathomable 0.06% from 0.70% yesterday US 2-year government bond yields dropped 15bps to 1.655% last night (and are now down about 75bps since the start of September). The reduced yield support has weighed broadly on the USD, which combined with rising gold prices, saw EUR/USD surge from around 1.4100 to above 1.4350. In addition, to escalating fear about the health of the financial sector, a huge buy order of GBP/USD also helped pressure the USD. Market chatter suggests the buy order was shared around several custodians and totalled more than a billion sterling. While it's always difficult to know how much faith to put in rumours, a large flow would go some way to explaining why GBP/USD surged from below 1.7900 to above 1.8200 last night.  

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