Analysts get bearish on the kiwi dollar

The New Zealand dollar will drop for the first year in four on speculation the economy will slow and the central bank may cut interest rates, a Bloomberg survey said.

New Zealand's dollar may drop to 67USc, the lowest since October, from 70.49USc yesterday, according to the median forecast of 31 analysts surveyed by Bloomberg between January 4 and February 1.

The New Zealand dollar is up 57 per cent since the start of 2001, the third-best performance against the US dollar. Only the Czech koruna and Slovakian koruna fared better.

"We're bearish on the New Zealand dollar in 2005," said Johnathan Bayley, a currency strategist in Wellington at Westpac Banking Corp. The Reserve Bank "will start cutting interest rates by the end of the third quarter".

Foreign investors may reduce investments in New Zealand bonds because yields will fall as rates decline, the survey said.

International investors held 64.9 per cent of the nation's government bonds at the end of last year, helping to spur the rally in the New Zealand dollar, according to the central bank.

The yield spread between 10-year New Zealand government bonds and US notes with a similar maturity shrunk to 1.91 percentage points from a 16-month high in September of 2.19 percentage points, close to the average for the past 10 years.

The gap will shrink to about 0.9 of a percentage point, according to Westpac, as Reserve Bank Governor Alan Bollard responds to slowing economic growth by lowering the country's benchmark rate for the first time since 2003.

The lowest survey estimate, from Westpac, says the currency could drop as low as 56USc by year's end.

New Zealand's gross domestic product rose 4.4 per cent in the third quarter from a year earlier, more than any of the Group of Seven nations and the euro region. Growth will slacken to 3.5 per cent by March and 1.5 per cent by March 2006, Bollard forecasts.

Eight of 12 economists Bloomberg surveyed on January 21 said Bollard would reduce the benchmark rate from 6.5 per cent by the end of September. Westpac predicts the rate will be cut to 5.75 per cent by year's end.

"The New Zealand dollar has had an astronomic rise," said Michael Derks, chief global strategist in London of the Commonwealth Bank of Australia, which owns the ASB Bank. "It's come a very long way and there are some signs of slower economic activity."

The spread between New Zealand and US debt may narrow to about 1 percentage point this year, said Derks, who predicts a decline in the currency to 65 cents.

Fed policy makers boosted their target interest rate by a quarter-point, the sixth such increase since June, to 2.5 per cent on February 2.

The last time the Reserve Bank lowered borrowing costs was on July 24, 2003, when it pared the benchmark rate by a quarter point to 5 per cent. The New Zealand dollar fell 1.1 per cent that month, the biggest decline in a year.

Predictions of a reduction in rates are premature, said Richard Yetsenga, a currency strategist in Hong Kong at HSBC Holdings. "It's difficult to see any notable declines in the currency near-term."

The currency would rise to 73USc before retreating to 67USc by December 31, he said.

The kiwi dollar reached a record 72.75USc in June 1988.

Sydney-based FxMax had the highest forecast for the kiwi, projecting that it would rise to 76USc.

- BLOOMBERG