Fed to restrain flying NZ dollar

The New Zealand dollar is expected to remain at elevated levels throughout this year but the United States Federal Reserve's plan to start winding back its US$1 trillion ($1.2 trillion) a year quantitative easing programme is expected to restrain the currency's progress, say economists and currency strategists.

While the kiwi's fortunes might be capped in 2014, the currency was still likely to remain above US80c - well over its long-run average of about US70c, they said.

That would continue to put pressure on exporters, particularly manufacturers who do not enjoy the benefit of high commodity prices to balance their foreign earnings.

The widening gap between the performance of the Australian economy and New Zealand's could see the currency cross rate reach parity late this year after hitting a series of five-year highs late last year, said HSBC chief economist Paul Bloxham.

The prevailing theory in the foreign exchange markets was that the Fed's move to wind back its bond buying programme this month would help restore to good health the long-suffering US dollar, thereby putting downward pressure on the kiwi.

But Westpac said expectations of high dairy product prices and strong economic growth, and a series of interest rates hikes, were likely to support the currency - causing it to broadly shift sideways throughout this year. Westpac chief economist Dominick Stephens said the "stratospheric" rise in dairy prices, alongside a strong uplift in economic growth this year, meant the Reserve Bank would need to raise its official cash rate five times this year, up from its previous forecast of four.

Those factors together meant the kiwi was likely to remain in the mid US80-90c range for most of the year, he said. Stephens said he would not rule out the kiwi reaching parity with the aussie this year, but the bank's forecast was for a cross rate to remain contained at above A90c.

HSBC's Bloxham said NZ had emerged as a "rock star" economy among the OECD.

"I don't think you are going to see any downward pressure on the economy any time soon.

"The strong kiwi is here to stay and we think it might get to parity with the Australian dollar by late [this] year," Bloxham said.

"It's a good news story but it comes with a challenge and that challenge is a currency," he said, adding he expected to see the kiwi at US87c against the greenback at the end of the year - just short of its post-float high of US88.40c, set in August 2011.

Sam Tuck, foreign exchange manager at ANZ Bank, said the kiwi should hold, but its record post-float highs would go unchallenged this year.

"You would have to suggest that with the United States data, and the fact that the Fed is comfortable enough to start to change its policy, it will be difficult for the kiwi to get above those 2011 highs, despite the booming NZ economy," Tuck said.

Bank of NZ strategist Kymberly Martin said the Fed's signal that it would this month start tapering its US$85 billion monthly bond buying programme to US$75 billion, and local data showing growth was stronger than expected at 1.4 per cent in the September quarter, had confirmed two key messages.

Firstly, the process of the Fed's "tapering" did not necessarily spell the death knell for the kiwi. Secondly, strong domestic data delivery - such as the New Zealand GDP number - was no longer sufficient to push the NZ dollar to greater heights.

"This New Zealand story is now well known," Martin said. "The NZD/USD is unlikely to return to its peaks. That said, we see the NZD/USD well supported in the near-term, and expect it to trade above 0.80 for much of the first half of 2014."

Martin did not sign up to the kiwi/aussie dollar parity theory.

She said the cross rate had become "stretched relative to fundamentals" which suggested a "fair value" range of A85c to A87c.