Renewed squeeze on the kiwi

Downward pressure on the New Zealand dollar will remain strong for the foreseeable future, currency traders said yesterday as the kiwi touched fresh six-and-a-half-year lows below US50c.

The kiwi traded as low as US49.12c - its lowest level since November 2002 - as stock markets fell and traders headed for the relatively safety of the greenback and euro.

By 8am today the NZ dollar was buying US49.52c, having dipped below US49.20c several times overnight after dropped as low as US49.12c - its lowest level since November 2002 - early yesterday afternoon.

BNZ Capital currency strategist Danica Hampton said the NZ dollar had been swept up in a "global melee".

The New Zealand dollar peaked at US81c last March and has fallen steadily since. Already this year it has dropped nearly 30 per cent since January.

"The outlook is pretty bleak," said Sydney-based Deutsche Bank currency strategist John Horner.

And while the US was the source of much of the financial woe, Horner said the greenback was unlikely to weaken to reflect this any time soon.

"While things are bad and getting worse, the US dollar will retain that safe haven status. It remains the world's viable reserve currency status. On a longer timeframe, the debts being accumulated now suggest the US dollar will have to weaken but we don't think that's a story for the near term, rather one for when the world does show signs of recovering."

He was expecting bad US news to keep on coming.

"The coming week is packed full of event risk," said BNZ currency strategist Danica Hampton. "Not only will currency markets be keeping a close eye on equity markets but there is a barrage of US data and a host of central bank meetings."

The grim US data and Friday's falls on Wall St saw stock markets throughout Asia fall further yesterday.

The NZX fell 1.6 per cent to a fresh five-year low of 2481. Australia's ASX also went through a fresh five-year low closing down 2.8 per cent.

Another downward pressure on the dollar was the growing yield differential between the Australian and New Zealand market, said Westpac market strategist Imre Speizer. The high interest rates that could be earned by investors in the kiwi had for years been a big driver of demand for the currency but these had been eroded swiftly, he said.

While yields on local interest rates were currently not much below Australia's, they were likely to widen with the Reserve Bank of Australia expected to cut rates by a relatively small 0 to 25 basis points today while the RBNZ was still "front loading" its rate cuts, and was expected to go by 75 basis points next week.

"We think a big driver at the moment for kiwi is the likely difficulty that New Zealand as a country will have funding itself offshore."

That theme was set to pick up steam in coming sessions, he said.

Speizer expects the kiwi to trough somewhere between current levels and US45c in the medium term.

"If we hold under US50c [overnight] that will confirm that's the new cap. The next technical target is US46c. Most likely we'll wash in the US48c to US50c range for a while."

The lower dollar is good news for the exporters who trade in US dollars - a drop against the greenback boosts earnings when they are converted back to local currency.

Federated Farmers economics and commerce spokesperson Philip York said farmers were already benefiting from the lower dollar. "This explains why Federated Farmers is one of the few organisations not panicking about the state of the economy," he said.

But while the lower dollar would make exporters more competitive in the short term "it was a two edged sword", he said. "Inputs such as fuel respond quickly to international price movements. While fertiliser, machinery and technology do lag, they do eventually follow as well."

York also cautioned against exporters relying on a low dollar as a crutch. "There are huge downsides if exporters believe a low value currency is the future and build market expectation accordingly," he said.

"When the dollar was overvalued, we were still exporting product, so a low value strategy will waste the huge potential agriculture offers."

Federated Farmers' fair value range for the dollar is between US60c and US65c.