The credit crunch is generating high drama in the currency market with the New Zealand dollar swinging through a massive range early yesterday as central banks around the world rearranged the global interest rate landscape.
Having closed locally at US62.47c on Wednesday, the kiwi plummeted to a five-year low of US57.75c as a co-ordinated move by central banks to cut interest rates prompted widespread flight to safe haven currencies, principally the US dollar and yen. By 8am yesterday it was at US61.12c and closed for the day at US60.85c.
"What's happening is that the currency, interest rate and equity markets are all grappling with a new reality and how they reprice currencies and asset prices based on the changing economic circumstances," said ANZ head of markets John Body.
"There's two dynamics happening around the world. One is that interest rates and interest rate differentials are changing dramatically and the second one is the forecast outlook for growth in the world is also changing.
At the moment it's fair to say there's so many conflicting views that the net result of the conflict is the level of volatility we're seeing."
Body said some of the volatility might have been because of expectations the Reserve Bank would act in concert with other central banks and make an immediate hefty cut to its official cash rate.
"Given the events of last night if there was a window open for them it was then."
Although Governor Allan Bollard chose not to move, the market was still expecting a 100-basis point cut at the RBNZ's next scheduled rate call on October 23.
On that assumption the New Zealand dollar was "probably not too far away from fair value" at current levels, said Body, but he expected further volatility for some time.
"I think we're going to have a very interesting last calendar quarter."
The Australian dollar is also being tossed around, on Wednesday night sliding to US67.64c from US71.15c and was US69.06c at 5pm last night. At A88.10c, Body said the kiwi was looking stretched against the Australian unit.
