KEY POINTS:
The New Zealand dollar climbed back above US77c yesterday after an interest rate cut by the US Federal Reserve, but some economists are surprised it is not higher still.
The cut in the Fed funds rate to 4.5 per cent had been widely expected but it still saw the US dollar weaken against many currencies including the kiwi.
At US77.2c in local trading yesterday, the kiwi was back where it was in the middle of last month
"In some ways I'm surprised the kiwi dollar is not higher at the moment," said Deutsche Bank chief economist Darren Gibbs.
Overseas investors were getting the message that the New Zealand economy still had legs, he said, with both high export commodity prices and expectations of a fiscal stimulus to come.
While the housing market had softened, "we are not seeing the data to suggest the economy in a broader sense is falling over. The National Bank [business confidence] survey yesterday looked pretty resilient. But while the Australian and Canadian dollars have been reaching new highs, the kiwi is still 4c short of its peak."
Westpac economist Sharon McCaw said the cut by Fed chairman Ben Bernanke had further widened the gap between US and New Zealand interest rates.
Between the start of 2006 and the middle of this year there had been a very close relationship between the gap between US and New Zealand two-year interest rates on the one hand and the exchange rate on the other. But lately the kiwi had not risen as much as that yield differential would suggest it should.
"All the other currencies which fell sharply when the world credit crunch started have bounced back sharply to multi-decade highs. The New Zealand dollar hasn't. It is nowhere near its US81c peak," she said.
"If that relationship with the two-year spread were holding, we would now have an exchange rate up around US84c."
But while the kiwi has been strengthening against the US dollar and Japanese yen over the past three months, it has fallen against the Australian dollar.
At A82.9c yesterday it was back at its post-float average and 4c lower than where Westpac reckons fair value now sits.
It is the transtasman exchange rate which matters most for exporting manufacturers. The National Bank's survey found firms' export expectations holding up well by historical standards.
"The mineral boom in Australia makes our commodity price boom look inconsequential," said Bank of New Zealand chief economist Tony Alexander.
"We can ride on the coat-tails of China directly and through Australia as well. So there is substantial insulation for the New Zealand economy against the high kiwi dollar."
Announcing its 25 basis points rate cut, which followed a 50 point cut in September, the Fed said strains in the financial markets had eased somewhat but US growth was likely to slow as the housing market correction intensified.
However, that had to be balanced against recent rises in energy and commodity prices which put upward pressure on inflation. The upside risks to inflation roughly balanced the downside risks to growth, it said - which taken at face value suggests US interest rates are now on hold.
"I wouldn't say they are sanguine about the outlook for the US economy. I suspect they are quite concerned. They have after all just cut rates," McCaw said. "But because of the inflation risks they can't make insurance cuts like they did under [Alan] Greenspan."
The markets still expect further cuts in US rates. The balanced statement yesterday might be a bid to discourage the markets from pricing in further cuts so aggressively that the Fed did not dare disappoint them, McCaw said.
Deutsche Bank's Gibbs is sceptical of the view that US and world growth have decoupled. "Certainly the link between the US economy and the rest of the world is weaker than it was, but it can't possibly be the case that previously the US was the be-all and end-all and now it doesn't matter at all. It is not quite as important but it is still important."
Mixed fortunes
* The kiwi rose after the US central bank cut interest rates.
* But it continued to soften against the aussie, aiding manufacturing exporters in their biggest market.
* And the high exchange rate provides a buffer against soaring oil prices.
