Ructions in market disrupt kiwi's ride

It's too early to tell whether the local currency has reached a turning point. Photo / Brett Phibbs

Ructions on world commodities markets have stopped the New Zealand dollar's rally dead in its tracks, but analysts say it's too early to tell whether the local currency has reached a turning point.

Up until its latest pull-back, the currency had enjoyed an extraordinary run - a US10c rally from US71.2c on March 17 through to US81.2c on May 2, driven mostly by US dollar weakness.

The kiwi had dropped back to US79.01c by late yesterday afternoon but at current levels the currency is still not far short of its record post-float high of US82.35c, which was in March 2008.

BNZ market strategist Kymberly Martin said the local currency's strength against the US dollar had "taken it well above what domestic fundamentals would dictate".

"The strength in NZD/USD has not translated into a similar increase in the trade-weighted index however, suggesting negative sentiment toward the US dollar has been a key contributor," she said.

While the New Zealand dollar has been volatile, the Reserve Bank's trade-weighted index, which measures the currency against those of New Zealand's main trading partners, was at 67.7 late yesterday, compared with an average of 68.2 in April, 65.2 in March, and 67.8 in February.

Martin said the kiwi was still vulnerable at higher levels.

"Risk appetite has waned and global commodity prices that had become quite elevated are losing some of their froth," she said.

But she said a shift in sentiment toward a more positive US dollar view is probably needed for a sustained decline in the NZD/USD rate.

Westpac market strategist Imre Speizer said the kiwi had reached a turning point but that it was unclear whether it was a correction from its rally since March 2009 - when the currency bottomed out at US48.95c - or its most recent US10c rally.

"I think it is a turning point for this move up since March 17, which has certainly been corrected, and I think its correction has got a few more cents to go," Speizer said.

"What I am not convinced of is whether this is a correction of the entire rally in risk appetite that has occurred since the global financial crisis," he said.

He said the dominant factors driving the New Zealand dollar remained global ones - US dollar direction and risk aversion.

In the commodities markets, oil prices plunged below US$100 ($127) per barrel, with mounting concerns about the US economy triggering the biggest one-day percentage decline in more than two years.

The US dollar had risen strongly against euro after the European Central Bank declined to signal that interest rates would rise again next month.

Oil, which is traded in dollars, tends to fall as the greenback rises and makes crude barrels more expensive for investors holding foreign money.

Global sentiment has trended downwards and it has affected mainly commodities, but also equities markets and the riskier currencies have just followed those moves, which is what the Australian, New Zealand and Canadian dollars have done, Speizer said.

But after three days of heavy selling, the kiwi was enjoying a measure of support after comments from the Reserve Bank of Australia yesterday, to the effect that higher interest rates may arrive sooner rather than later.

The Australian dollar rallied a little after the news, taking the local currency with it.