NZ dollar sinks as global share markets tumble, risk appetite declines

Friday 20th November 2009

The New Zealand dollar sank as share markets around the world tumbled amid nervousness about the strength of the global recovery as investors eschewed higher-yielding, riskier assets.

Stocks on Wall Street slid after Bank of America Merrill downgraded its growth estimate for semiconductor companies in 2010 to 18%, while the German DAX declined 1.5% after a government adviser raised the prospect that Europe’s biggest economy faces a double-dip recession when stimulus is withdrawn.

The Volatility Index, which measures the cost of insuring puts on the Standard & Poor’s 500, rose 3.2% to 23.14.

“Risk appetite was effectively taken off the table yesterday, and that flowed through into offshore as we saw equity markets come off,” said Philip Borkin, economist at ANZ National Bank.

“It illustrates how fickle sentiment can be – all investors need to see is a turn and they get scared.”

The kiwi sank to 73.01 U.S. cents from 73.35 cents yesterday, and dropped to 65.22 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 65.47 yesterday.

It declined to 65.01 yen from 65.35 yen yesterday and slipped to 79.45 Australian cents from 79.59 cents.

It fell to 48.95 euro cents from 49.30 cents yesterday and eased to 43.88 pence from 43.97 pence.

Borkin said the currency may trade between 72.70 U.S. cents and 73.45 cents today and will probably follow the Asian equity markets.

Leader of the Opposition Phil Goff yesterday announced an end to the consensus over monetary policy’s focus on inflation, though he didn’t go into any detail as to what the Labour Party would do if it regains the Treasury benches.

Borkin said until Goff said anything substantial, the market can’t take anything out of his comments. Policy makers around the world are growing more concerned about currency markets and the ongoing weakness of the U.S. dollar.

Brazilian legislators recently unveiled a 1.5% tax on certain trades involving American Depositary Receipts by Brazilian companies in a bid to curb the appreciation in the Real, though Borkin said these types of schemes haven’t been very successful in the past.

The kiwi dropped to 1.26 Brazilian reals from 1.29 reals yesterday.

“These things emphasise there’s a bit of concern in policy circles about currency markets,” he said.

Businesswire.co.nz

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