Kiwi dollar crash a godsend for some

The kiwi dollar crash has not been bad news for everybody, writes Jenni McManus.

The unprecedented meltdown of the kiwi dollar has been a godsend for some.

On Friday, an elated Kevin O'Sullivan, a foreign exchange dealer at OM Financial, reflected on the extraordinary week.

"Really busy mate it's been fantastic," he said. "The more the markets move the better. A large percentage of our client base were facing the right way on the kiwi, so they made a lot of money."

Since reaching 81.1USc on July 24 the kiwi has plummeted and by the end of last week it had dipped below 68USc. The volatility is unheard-of.

"We saw a 700 point range in the kiwi/yen," Sullivan said. "Go back as far as you like, you won't find a chart that big. We're seeing history being made."

Having made money from history, O'Sullivan is advising clients to stay out of the market until it settles down. The uncertainty triggered by defaults in the American mortgage market still has a long way to run.

Bank economists say forecasting is impossible.

BNZ chief economist Tony Alexander said investors overseas wanted their money closer to home.

"No one is certain where losses from the problems in the United States sub-prime mortgages will ultimately fall," he said.

Desperate for liquidity, hedge funds, too, are bailing out of the currency. Worse still, said Westpac chief economist Brendan O'Donovan, is that lenders are unwilling to do business because of the uncertainty about who might still be sitting on sub-prime "bombs", with losses appearing all over the globe.

"The uncertainty about where these opaque instruments are lurking, and how much leverage they entail, caused a `shoot first, ask questions later' approach to lending."

O'Donovan and Alexander say the level of "toxic" debt makes it too uncertain to predict the likely impact of about $2 billion worth of uridashi bonds set to mature this week. So far their maturities have been exceeded by new borrowing, pushing the kiwi higher, but there are fears this might not happen this time. Alexander says it seems reasonable to expect these might not be "fully rolled over", adding to our vulnerability. What now?

O'Donovan has two possible but contradictory scenarios, each of them equally probable. Scenario one is that "it'll all blow over". As the panic subsides, the markets will find a floor, with sharemarkets selectively punishing companies based on assessments of their probable loss exposure.

If the kiwi were to fall lower and remain low, the Reserve Bank will face a major inflation problem (about 1% for every 10% the exchange rate drops).

Scenario two, "it'll all blow up", is the uglier picture. The credit crunch continues, good firms fail worldwide and the US is plunged into recession. Commodity prices fall sharply and non-commodity exports and tourism suffer.

But, said O'Donovan, the kiwi is New Zealand's insurance policy. It will continue to drop "like a stone", he says, buffering the impact on exporters.

Interest rates cuts? Far from a given, O'Donovan said.

He noted drily that as the kiwi fell, the currency of the country that had caused all the mayhem, the US, was getting stronger.

"One has to savour the irony of stashing the cash under the mattress in the house that's burning."

- © Fairfax NZ News