KEY POINTS:
The New Zealand dollar plumbed fresh two-year lows yesterday as concerns about the global economy contributed to some of the choppiest trading seen in the local unit in years.
Having already been tossed around in overnight trading reaching as high as US68.80c, the kiwi opened at US67.39c yesterday but sank to a 22- month low of US65.90c by mid-morning.
"It's pretty much consistent with what we're seeing across the rest of the forex market," said Royal Bank of Canada currency strategist Sue Trinh.
"Currencies are all getting blown around by the US dollar strength and also rising risk aversion. Clearly, the double whammy is hitting the kiwi although it has snapped back quite sharply from the lows we saw this morning."
The New Zealand dollar ended yesterday's session at US66.60c.
Trinh said the US dollar strength was not so much a case of it being viewed favourably, more that the outlook for other currencies was gloomier as their economies show signs of having caught the US economic malaise.
On Thursday night, the European Central Bank downgraded its growth forecasts which caused the euro to weaken considerably.
Meanwhile, a shocker yesterday on Wall St, with key indexes falling 3 per cent, was followed up by selloffs on Asian markets. Trinh said recent hedge fund closures contributed to the equity market sentiment which in turn was fuelling risk aversion on currency markets.
"Leveraged investors are running to exit from carry trades," said Trinh.
The kiwi/yen cross is a favoured pair for carry traders who borrow in a low yielding currency like the yen to invest in a high yielder like the kiwi.
As investors abandoned their positions in the kiwi yen, the kiwi fell sharply against the Japanese unit. which in turn prompted a wave of stop loss selling as Japanese investors who'd bet the kiwi would strengthen were forced to crystallise losses.
However, Earl White of Bancorp Treasury Services believed the aussie's move from US98c to US81c in just a couple of weeks left it overstretched.
"It's hard to justify the current collapse in terms of risk aversion, commodity prices and the Aussie economy versus others."
That potentially set the scene for a strong recovery by the aussie and by default, the kiwi.
