KEY POINTS:
The New Zealand dollar is poised to reach a fresh post-float high against the greenback and an Australian economist says it could reach US89c this year.
The kiwi backed off Friday night's six-month high of US79.61c yesterday, but remained within spitting distance of the dreaded US80c mark and last year's post-float high of US81.10c. Last night it closed at US79.14c, having gained 6 per cent against the greenback during the last two weeks.
The local currency's gains came as the US Federal Reserve cut its key interest rate by 50 basis points last week and 75 basis points the week before. The cuts have in part succeeded in shoring up confidence in stricken financial markets, thereby rekindling appetite for riskier currencies like the New Zealand dollar, while increasing the difference in interest rates between the two countries.
Clifford Bennett, chief economist at Sydney financial services firm Sonray Capital Markets, forecast a new chapter in foreign exchange carry trades, with the now low-yielding US dollar replacing Japan's yen as the preferred currency to borrow in order to invest in high-yielders like the kiwi.
Last year the kiwi's post-float peak was driven by carry trades funded by borrowing in Japan's yen.
"The new carry trade is going to be a US dollar carry trade," said Bennett.
The Fed's recent cuts, which Bennett believes will be followed by more, have taken its key rate to 3 per cent against New Zealand's 8.25 per cent. "That New Zealand dollar stands out rather brightly in terms of yield plays. The New Zealand dollar will continue to be bought quite aggressively.
"A move up to US83c could happen in a matter of days. Towards year end, you could be talking about US88c or US89c."
A sustained period above the US80c mark is likely to crush much of New Zealand's export sector, commentators warn.
Royal Bank of Canada currency strategist Sue Trinh said it was hard to disagree with Bennett's view, "purely on a bearish US dollar outlook and also on rate differentials", although she was far less bullish.
"High-yielding currencies like the kiwi are still very much at the mercy of investor or risk appetite which can turn on a dime."
"We see a peak of US80c in the next three to six months with a modest petering out to the US75c area by year end."
