Kiwi's wild ride set to continue

A double whammy of unsettled overseas markets and unexpected local economic data has sent the New Zealand dollar on a wild ride and more volatility is expected.

The kiwi opened yesterday on US71.93c, close to 3c down against the US dollar in just 24 hours. Poorer-than-expected New Zealand inflation figures pounded it down 2c on Wednesday and news of China tightening its bank lending pushed it down a further cent overnight on Wednesday.

The Wednesday fall was the biggest one-day fall since November 26 and at one point the kiwi was as low as US71.82c - its lowest point so far this year. But better-than-expected retail data, released yesterday morning, pushed it back up to US72.3c.

BNZ currency strategist Danica Hampton said the kiwi had been hit by a "perfect storm". She said the currency's woes began with softer-than-expected consumer price data.

The drop of 0.2 per cent was weaker than most economists had forecast, pushing out expectations that the Reserve Bank would raise interest rates sooner than the second half of this year.

Then global news of a tightening in bank lending in China and a drop in equity markets in the US added to the pressure. "The rest of the world is relying on China to spur on global growth and plans to curb that worried the market."

Equity markets also struggled on worse-than-expected results from the US banking sector. "It really has been a perfect storm, that is why we have seen such a sharp downturn."

Westpac head of currency and interest rate strategy Imre Speizer said the biggest worry pushing on the dollar was news of China tightening its bank lending. Speizer said that while local data pointed to signs the economy was getting better, the international recovery was seeing more hiccups.

Yesterday China also revealed GDP figures for the last quarter of 2009 which were better than expected, spurring more fears the Chinese Government would put even more pressure on its banks to tighten lending.

Speizer said China was important to New Zealand not just because of direct trading but also its close ties with Australia - New Zealand's largest trading partner.

"Because it has been driving the Australian economy - they are linked at the hip with China. The Aussies are watching because they are close to China and we are closely tied to Australia."

Speizer said even the euro was being affected by what was happening in China.

"Not only is Asia being seen as the driver of South Pacific growth but of world growth."

Speizer said that although the drop in the New Zealand dollar had been sharp, it had not come as a surprise.

"One of the biggest barometers of risk is the US equity markets and the pace of growth and momentum is looking shaky."

Speizer said there were enough hiccups in world markets at the moment to make it likely that the kiwi would remain volatile. But he said that over the next year he expected the kiwi to continue to rise despite the volatility.

Hampton said her long-term forecast was for the kiwi to stay strong on the back of the belief that the world economy was growing, not shrinking any more.

But she warned that the kiwi could peak in the middle of the year and then drop back depending on whether growth was seen as sustainable.

"We might start to see the currency run out of steam."