KEY POINTS:
Asian sharemarket losses continued to drive the kiwi dollar lower yesterday as international investors sought to avoid risk by unwinding carry trades that benefit from high-yielding currencies.
Last week's sell-off on global equity markets extended into this week with Japan's Nikkei index sliding more than 3 per cent yesterday to fall below 17,000 for the first time in nearly two months. The Hong Kong and Seoul markets were also sold off.
The kiwi was buying US68.32c at yesterday's local close, down about 2.5 per cent since the Shanghai stock exchange's 9 per cent fall last Wednesday.
However, the kiwi's fall against the Japanese currency has been far heavier. Yesterday, it closed at 79.04 yen, 7.6 per cent lower since the start of the sharemarket retreat.
BNZ currency strategist Danica Hampton said the global equities sell-off had seen investors seek to reduce their exposure to risky investment, including carry trades.
Carry trades have been a key factor buoying the kiwi. They are bets on high-yielding assets, such as the kiwi, financed by borrowing in currencies of countries with low interest rates, such as Japan and Switzerland.
"Usually in times of risk aversion, you'll see people pare back their exposure to high-yielding peripheral currencies like the kiwi or South African rand.
"They have to buy back the yen and then they have to exit their kiwi positions so the unwinding of the trade sees the yen get stronger and the kiwi get weaker."
However, this has exacerbated the Japanese market's fall as investors sell down exporters such as Toyota whose earnings suffer as the yen strengthens.
Deutsche Bank currency strategist John Horner said the unwinding of carry trades would probably continue. "The move has been abrupt by the standards of previous episodes."
The bank was "relatively cautious" on the longer term outlook for carry trades.
"The high-yielding currencies are stretched on a valuation basis and we think we are due, at some stage in the medium term, for a more protracted downturn in high-yielding currencies."
Kiwi Capers
* The kiwi has fallen by more than 7 per cent against the yen since the start of last week's global sharemarket jitters.
* Currency strategists say the kiwi has suffered as investors rapidly unwind carry trades.
* The yen has risen sharply, weighing further on Japan's sharemarket.
* This week's widely expected Reserve Bank interest rate increase may do little to halt the kiwi's slide if the carry trade unwind continues.
