Local markets jittery on overseas concerns

The New Zealand dollar fell towards 80USc this morning, and economists say it is still over-valued.

The fall came as financial markets went through another wave of fear and loathing as concerns rose about the liquidity of some European banks.

The turmoil which battered the European and US markets, and which spilled around the world, followed a week of relative calm – and that lull was itself a surprise, said Westpac Bank New Zealand chief economists Dominick Stephens.

“Until last night, sharemarkets and currencies did appear to calm down over the past week or so. Nobody expected that.  Usually, after the kind of adjustments which followed the Standard and Poors downgrade goes on for a while, and there’s really no precedent for the kind of calm we’ve had over the last week.”

One of the factors driving the latest financial shockwave was the realisation that major risk factors are still ticking away in the financial system.

“The metrics of risk, like inter-bank trust levels, remain at concerning levels, and so far as our Reserve Bank goes, the financial markets remain fragile.”

The New Zealand dollar fell over a cent this morning, from 83.20USc to 82.15USc by 10.10am, and it is expected to fall towards the 80USc mark by next week.

“The New Zealand dollar still looks over valued, given what is happening to local commodity prices.”

Bank of New Zealand senior economist Craig Ebert said the latest financial anxiety attack could be a dose of realism.

“Is this simply a good rinse-out, as people wake up to the reality they were tyring to ignore, or is it something more negative?  That’s not clear, but there’s more ducks lining up [for the latter]: a poor US manufacturing survey overnight, plus long term bond rates in the US going back down to where they were in during the global financial crisis.”

The big US concerns are contagion from debt-steeped and exposed European banks.  A report, over night, of an unnamed European bank borrowing large sums in dollars – and not the conventional Euros – from the European Central Bank has been a major trigger for the latest surge of concern.

The amount borrowed was $US500 million, a relatively modest sum, but it was the fact the loan happened at all which seems to have raised alarm about the liquidity of the EU banking system.

There are as yet no implications for the New Zealand banking system, he said.

New Zealand banks have been “actively pre-funding” a lot of their funds, and credit statistics show minimal new lending in any case, as local businesses and households are taking a conservative approach.

The implications for the wider economy are not bad at this stage, he said.  The New Zealand dollar is coming down, but it has been universally seen as over-valued in any case and this should help exporters.

Prices for the commodities New Zealand specialises in are holding up reasonably well, he said.

Even though the Fonterra auction on Wednesday showed a 0.9% fall in the price, when converted into New Zealand dollars there was actually a small increase.