KEY POINTS:
Giant US hedge funds are dumping the New Zealand dollar in the foreign exchange market on expectations that its recent plunge has further to run.
Since US sub-prime mortgage and credit market woes spilled over into the forex market last week, the kiwi has lost just over 6 per cent of its value against the greenback as carry trade positions are unwound.
It sank further early yesterday, sliding below the US76c mark to US75.60c on follow-through selling after Friday night's 2c plunge but bobbed higher later in the day to close at US76.12c.
ANZ head of markets John Body said: "It's the first time we've actually seen US hedge accounts seriously look at short kiwi positions. They've refrained from selling the kiwi probably since it was in the US64c to US66c range. Now the Reserve Bank's gone to neutral and the global environment suggest the kiwi could in fact correct, they're quite happy to roll the dice again.
"It's a different dynamic at the moment and it just means there's a lot more pressure on the top for the kiwi."
Short selling involves selling a particular currency or other asset that the seller doesn't have in the belief that by the time the transaction is settled the seller will be able to buy it at a much lower price and bank the difference.
Body said the kiwi dollar's short-term prospects would continue to be dictated by events in the US.
"Tonight, if the Dow opens up and heads down below 13,000 which looks highly likely given the pressures are building on that market, I think you'll see another down night in the kiwi.
"I think we'll probably see kiwi at some stage this week touching back toward the low US73c mark.
"If you look at our move from US72c to US80c, it all happened in the space of six to eight weeks and traditionally in bull markets you get that big violent move right at the end and I think history will show that move signified the top of the currency."
If domestic data pointed to a softening in the economy, the kiwi would fall further.
"A string of weak data over the next three months could see a move to sub US70c," Body said.
Bank of New Zealand currency strategist Danica Hampton expected the kiwi to "remain heavy throughout the overnight session and probably the whole week" as carry trade unwinding continued.
She pointed out that the kiwi-yen cross, the currency pair on which carry trades have the most influence, pulled back about 10 per cent following the market volatility seen in February and March which resulted from a Chinese sharemarket correction.
With the kiwi currently trading at 90.13 yen, it has now lost 8 per cent since the US problems emerged. "The question from here is whether this is going to be a worse pullback than we saw then? I think these credit concerns have the potential to linger a little longer," Hampton said.
"While we've still got credit spreads widening and global credit markets looking a little soft, we'll probably see a deeper pullback."
FOREX FACTORS
* US hedge funds have emerged as big sellers of New Zealand dollars as the kiwi continues to fall.
* Hedge funds aggressively manage portfolios of investments using advanced strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns.
* Further unwinding of carry trades is also weighing on the kiwi dollar.
* Carry trades involve borrowing a low yield currency like the yen to invest in a high yielder like the kiwi.
* The strategy relies on low volatility in global markets, and the fallout from recent US problems has seen many carry traders cut their losses.
