Culprits elusive as kiwi falls

The dollar's lacklustre start to the new year has prompted speculation that international hedge funds are playing the market on expectations of a sharp fall in the kiwi.

While the kiwi has obliged such a scenario by staging a faster-than-expected retreat so far this year, perceptions of hedge fund involvement appear misplaced.

John Body, head of markets for ANZ and the National Bank, said overseas hedge funds typically accounted for less than 5 per cent of the average $1 billion flow through the local currency market.

"There's been no unusual activity. Hedge funds are present as usual, accounting for less than 5 per cent of flows - small but still a significant amount," he said.

That leaves little option but to point the finger at the usual culprit for local currency moves - the United States dollar.

A Westpac foreign exchange dealer said: "It's still a US dollar story so whether the kiwi heads lower still is going to be dependent on the US, and their data has been more upbeat this year."

Earlier this week, the US Federal Reserve gave a clear message that it was worried about inflation and suggested it would keep lifting US rates.

The bank's comments have seen the greenback spike mildly higher, putting currencies such as the kiwi, aussie and euro under pressure.

The local market is divided on if this is the end of the golden weather for the kiwi.

Most expect the kiwi to drift lower this year but not this soon or determinedly.

A Reuters survey of 12 banks shows the kiwi is expected to drop back to a median forecast of 66USc at the end of this year.

But the range is wide with some estimates seeing it reaching, if not breaching, the post-float high of 72.75USc as New Zealand's interest rates continue to attract investors.

"It's not outperforming or underperforming any currency bar the US dollar. We're not going down against the Australian currency, we're not really going down against the euro.

"We're just bouncing along with the fluctuations in the US dollar," Body said.

"While we've come up to 72USc quite quickly, and we've been quite volatile, the fundamental view of the US dollar hasn't changed: the twin deficits will result in a US dollar [downward] correction at some stage in 2005 so we'll see the kiwi up into the low 70USc again."

He is one of those picking the kiwi to top its post-float high of 72.75USc some time this year.

"We're certainly not seeing anyone saying we don't like New Zealand, we don't like the New Zealand story. In fact, when the kiwi dipped below 70USc, there was some quite aggressive buying from offshore investors."

Also, despite the growing current account deficit, global markets aren't too concerned as the Government is running a significant fiscal surplus and there is an increasing global demand for commodities.

The gaping deficit is largely due to overseas ownership of local companies, resulting in large dividends being paid out overseas - which does expand the deficit but is positive as it shows the economy is strong.

Citigroup New Zealand economist Annette Beacher sees the kiwi down at 67USc by year end as it underperforms the US, where interest rates are on the up.

The jury is also out on the effect a weaker kiwi would have on the stock market.

The rule of thumb is that a weaker dollar helps exporters but hurts importers. However, at this early stage it is difficult to generalise on the market effect.