Currency: Tide turns sharply down for NZ dollar

The New Zealand dollar fell sharply today against all currencies as investors quit the kiwi on fears of recession and expectations the two year tightening phase is over.

ANZ National Bank's business confidence survey out today showed businesses have turned negative about their own outlook -- pointing to increased prospects of recession.

Dealers said the likelihood for another rate rise in January to quell inflation looked more remote and investors keen on the kiwi's high interest rates, particularly those from Japan, were departing.

The kiwi fell sharply in overnight trading, opening here at US69.47c, down from US70.64c at 5pm yesterday and it slumped further in hectic trading to US68.85c by the close.

A senior Wellington dealer told NZPA the fall was essentially a continuation of the liquidation of carry trades earlier in the week. Carry traders borrow in a low interest rate regimes, such as Japan, and invest in a high interest rate regime, such as New Zealand.

He said there has been heavy worldwide demand for yen, which was tied to the sale of gold.

In New Zealand the Reserve Bank is seen easing off the brake.

"There's more uncertainty about a rate hike in January. I think that's the key."

The kiwi cross rate against yen fell to 79.85 yen from 82.91 yesterday.

The yen also jumped to a six-week high against the dollar and a one-month peak versus the euro on Friday, extending its rapid rally this week as yet more traders bought back the Japanese currency after a year-long slide.

Traders were scrambling to buy back a yen sold in carry trades and suppressed by an inability to attract investors due to near-zero interest rates in Japan.

Speculators, such as hedge funds, had been borrowing the yen for almost no cost and selling it in carry trades to buy higher-yielding currencies like the US, Australian and New Zealand dollars.

"The market is testing how far this unwinding of carry trades will go," said Nobuo Ibaraki, forex manager at Nomura Trust and Banking. "It will take about 1-2 weeks to find a bottom."

New Zealand growth and current account data due next week are likely to encourage the kiwi even lower.

The current account deficit is expected to have swelled to a fresh record in the September quarter, pushed up by further deterioration in the goods trade balance, according to economists.

The median forecast of a Bloomberg poll of economists was a current account deficit of $12.6 billion for the year -- 8.3 per cent of GDP -- and $4.83 billion for the September quarter.

GDP growth for the September quarter is picked at around 0.4 per cent, which would see the annual growth rate fall to 2.6 per cent.

Dealers said if GDP weakness is evident then it was likely the two-year tightening cycle was over and the kiwi dollar would trend down.

Against the Australian dollar the kiwi fell to A92.40c from A93.60c while against the euro it dropped to 0.5762 from 0.5897.

The Australian dollar was far from immune to the carry trade liquidation -- it closed one US cent lower at US74.52c from its US75.48c close here yesterday.

Rates:

5pm today 5pm Thursday
NZ dlr/US dlr US68.85 US70.64
NZ dlr/Aust dlr A92.40 A93.60
NZ dlr/euro 0.5762 0.5897
NZ dlr/yen 79.85 82.91
NZ dlr/stg 39.05 39.87
NZ TWI 70.63 72.34
Australian dollar US74.52c US75.48c
Euro/US dollar US1.1950 US1.1982
US dollar/yen 116.06 117.27

- NZPA