Opinion: Why the NZ$ is falling fast

By BNZ Currency Strategist Danica Hampton It was another roller coaster night in currency markets. After climbing up towards 0.6880 early in the offshore session, NZD/USD slid sharply back towards 0.6700 as the night progressed. (Updated. Since this commentary was written the currency has fallen as low as 66.5 US cents in morning trade.) Early in the offshore session, profit-taking and real money demand out of Asia underpinned NZD/USD. Market participants shrugged off weak Eurozone data and as widely expected both the ECB and Bank of England left interest rates unchanged at 4.25% and 5.00%. Against this global backdrop, NZD/USD climbed from 0.6800 to around 0.6880. But the NZD strength didn't last long. Escalating concern about the health of the global economy, heavy losses in global equities and risk aversion triggered a wave of JPY cross selling. European equity indices fell 2.5-3.0% and the S&P500 is down nearly 3%. Comments from Eurogroup Chairman Juncker, warning that EUR was over-valued, also provided a bit of a prop for the USD. NZD/JPY plunged about 3.5%, from above 74.50 to around 72.00, and NZD/USD was dragged to around 0.6920 "“ its lowest level since August 2007. Given the extreme moves we've seen over the past few days, we'd normally look for a bit of consolidation in NZD/USD. As investors trim positions ahead of tonight's US non-farm payrolls release (market forecasts are looking for job losses of 75,000 in August) we would normally expect to see NZD/USD stabilise. However, the wild card today will be Asian equities. Should Asian equities fall heavily today, this will likely trigger another wave of NZD/JPY selling and keep the downward pressure on NZD/USD. A break below initial support in 0.6700-0.6720 region will open up the downside towards the August 2007 low of 0.6640. On the topside, expect the currency to face headwinds towards 0.6880-0.6900. The USD strengthened against most of the major currencies last night, amid worries about slowing global growth and weakening commodity prices. As widely expected, the ECB and the Bank of England left interest rates unchanged last night. As is usual with a "no change" decision, the BoE did not release a statement and the next clues on BoE thinking will come from the Minutes (published in two weeks time). The ECB statement acknowledged that Eurozone growth is slowing (its GDP forecasts for 2008 have been revised down to 1.4% from 1.8%), but made it clear that it has no intention of cutting interest rates any time soon. Despite the central bank decisions, EUR/USD slipped from nearly 1.4550 to below 1.4350 pressured by official comments and selling of EUR/USD. ECB President Trichet noted that US officials still favour a strong USD and while Eurogroup Chairman Juncker has welcomed the recent correction in EUR/USD he stated the EUR was still over-valued. Escalating concern about the global growth outlook continues to take a toll on commodity prices, global equities and risk appetite, which encouraged widespread selling of JPY crosses. European equity indices are down 2.5-3.0% and the S&P500 is currently down nearly 3%. Crude oil slipped about 1.5% to US$107.50/barrel and our risk appetite index is currently sitting at 44% well down on the 58% high seen a fortnight ago. EUR/JPY plunged from above 157.50 to below 153.50 "“ its lowest level since March 2008 "“ and USD/JPY sank from above 108.50 to below 107.00. Last night's US data was a little mixed. The non-manufacturing index came in at 50.6, well above forecasts for 49.5. However, the ADP employment index (which tends to be a leading indicator for non-farm payrolls) showed job losses of 33,000 in August (vs. 30,000 forecast). Market participants are now bracing themselves for tonight's US non-farm payrolls release. Economists are looking for job losses of 75,000 in August, although forecasts range from -150,000 to -30,000. Given the extreme currency moves we have seen over the past few days, we would expect to see some stabilisation as investors to trim positions ahead of tonight's US non-farm payrolls release. However, the wild card today will be Asian equities. Should Asian equities fall heavily today, this may trigger another wave of cross JPY selling which will keep the downward pressure on EUR/USD. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.