A$ and NZ$ skid as markets shun risk

WELLINGTON/SYDNEY: The Australian and New Zealand dollars skidded on Tuesday, as a credit downgrade for Italy and reports two Chinese state banks had stopped trading FX swaps with some European banks soured risk sentiment even further.

The Aussie fell to $1.0195, from $1.0224 in New York, having slipped to a six-week low of $1.0148 at one stage. Similarly, the NZ dollar dropped 0.5 percent to $0.8184, from $0.8257 in New York.

In a whippy session, the Aussie briefly bounced to a session high of $1.0243 after the Reserve Bank of Australia (RBA) reiterated it was best to keep rates steady given the murky global outlook. That prompted financial markets to pare slightly pricing of aggressive rate cuts.

But the rally was short-lived following a report two Chinese state banks had stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe.

Dealers have been worried that the euro crisis could morph into a global credit crunch, as in the days after Lehman's demise in 2008, when banks stopped lending to one another.

Earlier in the day, the Aussie was hit when S&P surprised by downgrading Italy a notch, adding to fears of contagion in the euro zone and worries about an imminent Greek default.

"It's about risk and at the moment, we see risk off the table. It doesn't matter that Aussie fundamentals have not changed at all... Risk is very vulnerable," said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore.

Heavy selling of Asian currencies added to the Aussie pain.

The local dollar has benefited from strong demand for emerging market currencies over the year and is now suffering as funds have been pulling back on concerns another global credit crunch may be looming.

The Australian dollar is often taken as a proxy for Asian currencies.

Asian central banks' intervention to prevent their currencies from weakening too quickly, has been rubbing salt in to the wound. Central banks are forced to unwind long Aussie hedges to rebalance their currency assets following the depletion of their US dollar reserves.

Risk aversion sent Asian stocks south, while currency investors favoured the safety of the US dollar and yen.

TD's Beacher said the Aussie is more likely to sink down to parity in this fragile environment unless there is confirmation that Greece won't default this month.

"But in our view, if it doesn't default this month, there are plenty of opportunities next month," she added.

The Australian dollar has lost 4.5 percent this month and has been holding above parity since March, having only dipped under it for a few hours in August, when it bottomed at $0.9927.

Traders reported some support under $1.0150 but noted technicals were bearish for a test of the Aug. 11 low at $1.0110. Hourly resistance found at $1.0270 and a break above that level could see a squeeze to $1.0300.

The Aussie dropped to a near six-week trough at 77.94 yen before steadying at 78.10. The kiwi slipped 0.2 percent to 62.75 yen.

But the Antipodeans gained on a depressed euro, with the single currency down 0.4 percent at A$1.3336 and near 7-week lows at around NZ$1.6589.

NEW ZEALAND DOLLAR

The New Zealand dollar had a volatile session.

"It's a very jumpy market today. People don't really have a clear view...just going with the news flow," said ANZ-National head of market economics and strategy Khoon Goh.

The currency is still seen supported at $0.8170 with resistance at $0.8290.

Against the kiwi, the Aussie held onto gains, trading around NZ$1.2439, off a six-week low of NZ$1.2343 struck on Monday.

The kiwi was also not helped by expectations of a longer wait for rate hikes, with markets now pricing out any rate hike until March next year and pricing in only 40 basis points of rises over the next 12 months.

Markets await second quarter current account on Wednesday and growth data on Thursday. A Reuters poll forecasts the economy grew 0.5 percent, while the current account deficit is seen shrinking slightly to 4 percent of GDP.

New Zealand government bonds gained on safe-haven demand, with yields down around 2.5 basis points.

Australian bond futures edged up, with the three-year contract 0.01 points firmer at 96.430 and the 10-year 0.015 points higher at 95.840.

Copyright Reuters, 2011