Dollar volatility tied to stock markets

By Paul McBeth

Friday 17th October 2008

The New Zealand dollar may extend this month�s 8% slide, with volatility tied to swings in stock markets, on the prospects of a global economic downturn, lower interest rates and falling commodity prices.

US stocks staged a late rally yesterday after price of oil fell below US$70 per barrel, rebounding from the worst slump since 1987, the UK�s FTSE 100 fell 5.7%, and Japan�s Nikkei 225 sunk 11%. The kiwi plunged to 59.52 US cents yesterday, from 62.47 cents before rallying back above 61 cents in a round trip amount to 5 US cents.

�The market is pretty choppy and fragile,� said Khoon Goh, senior markets economist at ANZ National Bank. The New Zealand currency�s �broad trend is downwards with very wide ranges.�

The New Zealand dollar was recently at 61.54 US cents from 61.18 cents yesterday. It rose to 62.45 yen from 61.59. The Australian dollar also had big swings yesterday and was recently at 68.71 US cents from 67.17 cents.

The kiwi will likely trade between 59 US cents and 62.5 cents over the next week, Goh said. Concerted global efforts by governments to shore up confidence in financial markets and save the world�s biggest banks means investors are now �focusing on economic fundamentals,� he said.

US manufacturing data reinforced fears of a looming global recession. US industrial output fell 6% in the third quarter, the biggest decline since 1991.

Goh said the two main drivers that will push the kiwi currency down further are US equity markets falling further, increasing risk averse behaviour, and weaker economic figures from New Zealand.

New Zealand�s central bank will review the official cash rate on October 23, and Goh said the markets will be watching to see if Governor Alan Bollard delivers a 100 basis point cut in the official cash rate to 6.5%, as forecast in a Reuters survey of economists.

Falling interest rates will likely erode the appeal of the New Zealand dollar as a high yielding currency.

BusinessWire.co.nz

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