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NZ dollar drops to 10-day low as Brexit stokes uncertainty

Monday 27 June 2016 08:44 AM

NZ dollar drops to 10-day low as Brexit stokes uncertainty in financial markets

By Paul McBeth

June 27 (BusinessDesk) - The New Zealand dollar fell to a 10-day low against the greenback after the British public's vote to quit the European Union caught investors off-guard, stoking uncertainty in financial markets and raising the prospect that local interest rates will have to go lower.

The kiwi fell to 70.80 US cents at 8am in Wellington from 71.30 cents on Friday in New York. The trade-weighted index gained to 75.91 from 75.36 last week as investors fled the British pound and euro after UK referendum.

The result saw the Sterling drop about 8 percent in a day and led to a sell-off in stock markets around the world as investors clamoured to the relative safety of the yen and US government bonds. Markets had been betting the public would choose to stay, and the Chicago Board Options Exchange's Volatility Index, known as Wall Street's 'fear gauge', spiked 49 percent to 25.76 on Friday, its highest level since February.

"It’s too early to judge that the worst is over – indeed it probably isn’t over," Bank of New Zealand currency strategist Jason Wong said in a note. "The political turmoil in the UK that has developed over the weekend and the months of uncertainty ahead suggest that a period of subdued risk appetite is likely to develop over coming weeks, which suggests more downside potential for risk assets and the NZD."

New Zealand swap rates tumbled when support for the exit vote became unassailable as investors predict the Federal Reserve will delay its tightening cycle, meaning the Reserve Bank will be more likely to cut the official cash rate when it next reviews policy in August. Two-year swaps were recently at 2.17 percent and 10-year swaps at 2.69 percent.

The Bank for International Settlements said central banks are ready to cooperate to support financial stability in the wake of the vote, which has already prompted currency interventions from the Swiss National Bank and Denmark's central bank.

ANZ Bank New Zealand senior economist Philip Borkin said the 'Brexit' vote will also hit commodity prices and credit markets.

"There would obviously be growth implications from weaker commodity prices, tighter credit markets, and a strong NZD," Borkin said. "Whatever the case, the odds of an August OCR cut have increased."

The local currency climbed 52.44 British pence at 8am in Wellington from 52.11 pence on Friday in New York and gained to 64.30 euro cents from 64.12 cents. It slipped to 95.29 Australian cents from 95.47 cents last week and dropped to 71.99 yen from 72.86 yen. The kiwi dropped to 4.6841 Chinese yuan from 4.7165 yuan last week.



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