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

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 70.80USc at 8am in Wellington from 71.30USc 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 % 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 % 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 NZ dollar."

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 % and 10-year swaps at 2.69 %.

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 NZ dollar," 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 95.29Ac  from 95.47Ac last week and dropped to ¥71.99 yen from ¥72.86. The kiwi dropped to 4.6841 Chinese yuan from 4.7165 yuan last week.

(BusinessDesk)