N.Z. Dollar Volatility Reaches Two-Month High as Risks Rise

By Liz Capo McCormick

Jan. 16 (Bloomberg) -- New Zealand dollar volatility touched the highest level in almost two months amid concern a weakening global economy will damp investor demand for the country’s exports.

The kiwi, as New Zealand’s currency is dubbed, has declined more than 9 percent versus the U.S. currency this week. Standard & Poor’s lowered the outlook on Zealand’s AA+ credit rating to negative from stable on Jan. 13, citing the risk that the nation’s current account deficit and overseas debt may curb growth and investment. Falling global economic growth means less demand and lower prices for the country’s exports, which include meat and hides, aluminum and dairy products.

“Volatility is reacting to expectations on the economic side and realized risks are starting to rise,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “There is clearly more downward potential for commodity currencies, like the New Zealand dollar, that are much more exposed to the weakening of global demand for its exports.”

The implied volatility on one-month options for the New Zealand-U.S. dollar exchange rate reached 30.8 percent yesterday, the highest since Nov. 24. The rate, which is a measure of expected price swings and which traders quote as part of setting currency option prices, is up about 9 percentage points from a recent three-month low of 21.08 on Dec. 16. Volatility remains below a record high of 42.97 percent set on Oct. 24, the highest since at least August 1997, or a far back as Bloomberg compiles data.

Further Declines Predicted

The kiwi dropped 0.6 percent to 53.91 U.S. cents in late New York trading yesterday, near a one-month low. The currency will weaken approximately 13 percent to 46 U.S. cents by the end of the second quarter, according to BNP.

Falling global growth weighs on domestic output as it reduces demand for commodities, which make up about 70 percent of New Zealand’s exports. New Zealand’s prime minister, John Key, said yesterday the economy may not grow this year and the jobless rate may reach 7 percent, up from the latest reported figure of 4.2 percent.

Options are contracts granting the right, but not the obligation, to buy or sell a specific amount of a security at a pre-set price and within a set time period.

Volatility in New Zealand dollar options is rising faster on puts, which grant the right to sell it versus the U.S. dollar, than on calls, which allow purchases.

Put-Options Premium

The one-month so-called risk-reversal rate on Kiwi-U.S. dollar options reached minus 4.2 percent, its greatest put premium since Dec. 17. The rate reached minus 7.85 percent on Oct. 27, its greatest premium since at least October 2003, or as far back as Bloomberg compiles data. Negative values show greater demand for Kiwi puts versus calls.

“If you owe the rest of the world a lot of money, then there is more risk potential when the economy degrades very fast,” Galy said. “Realized risks increase, the bigger the imbalances are.”

New Zealand’s current account deficit, the broadest measure of trade, is 8.6 percent of gross domestic product. The U.S. current account deficit was 4.8 percent of GDP, and the Euro zone countries’ was 0.5 percent, as of September.

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net