By Brian Fallow
WELLINGTON - Good news yet to happen has been priced into the New Zealand dollar.
Our dollar has climbed 5 per cent against the United States dollar over the past three weeks as the "commodity currencies" have come back into favour.
It ended the week around US55.9c.
Some of the recent strength of the kiwi could also be due to Edison Mission and other overseas investors buying the currency to cover their Contact Energy stakes.
The rapid appreciation has prompted a rare unanimity among bank economists.
"Premature," says the National Bank. "Overdone," says ANZ Bank. "It looks stretched at 55USc," says Bankers Trust. "It may not be enduring," says the Bank of New Zealand.
But it is not uncommon for economists to think that the financial markets have got ahead of themselves in anticipating a development - in this case a rebound in commodity prices - of which evidence is scant.
Nor are the economists necessarily right.
Bankers Trust chief economist David Plank said: "During 1997 and 1998 most forecasters, ourselves included, continually underestimated the extent to which the New Zealand dollar would fall."
Though the kiwi dollar has appreciated more than 2.5c against the US dollar since Easter, it has barely moved against the Australian. Both currencies, together with the Canadian dollar, are treated as commodity currencies and have been in demand from international investors anticipating a turnaround in commodity prices.
National Bank chief economist Brendan O'Donovan said: "The trouble is the commodity prices which are moving, like oil, aren't the ones we export."
Prices for many of New Zealand's agricultural commodity exports were at or near season lows, and while export volumes for forest products were back at pre-Asian crisis levels, prices were only about 7 per cent off their lows.
A recovery in New Zealand commodity prices would be next year's story, not this year's, he said.
ANZ chief economist Bernard Hodgetts said a significant rebound in commodity prices, broadly measured, remained unlikely in the near term.
"While signs of activity have brightened in Asia, the outlook for industrial production in many of the world's major economies over 1999 remains fairly subdued, especially Europe."
Consensus forecasts for global growth had not lifted significantly over the past month or so, he said.
Upward revisions for some countries had been offset by downward changes for others.
Some retracing of the kiwi dollar's recent rise was likely, especially as concerns about the balance of payments re-emerge later in the year and political uncertainty mounts as the election looms.
Mr Plank reckoned commodity prices had bottomed, but that a considerable rise in commodity prices was already priced into the kiwi. His mid-year pick for the kiwi was 55USc, rising to 59USc by the end of the year.
With short-term interest rates anchored by the Reserve Bank's new official cash rate, the rapid appreciation of the kiwi dollar represents a tightening of monetary conditions. The monetary conditions index is back in positive territory (by some 60 points) for the first time since August last year.
Bank experts frown on dollar's rapid rise
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