NZ dollar back in vogue as global fear factor subsides

File photo / NZ Herald

The New Zealand dollar has recovered after a sharp drop in March, buoyed by a renewed appetite for risk globally and reinsurance flows to cover damage from the Canterbury earthquakes in September and February.

The kiwi lost about US1c on the day of the February 22 earthquake and continued to crumble as the global negatives started to mount - the earthquakes, tsunami and nuclear emergency in Japan, then growing tensions in the Middle East and mounting European debt worries.

The Reserve Bank's decision to cut its official cash rate by 50 basis points (to 2.5 per cent) on March 10 added weight to the downward trend. But the currency started to bounce back around the middle of March, alongside America's Dow Jones Index, which is seen as the world's barometer for investor risk.

The currency hit US71.2c - its lowest since September 1, 2010 - after the Japanese earthquake on March 11 and has since bounced back to around US76c. It was at US76.13c at 5pm yesterday.

This newfound strength has already had an impact on fuel prices. Greenstone Energy - the New Zealand company behind the Shell service station network - yesterday cut its diesel price 3c a litre to 166.9c, due in part to exchange rate strength.

"We have been surprised by the strength in the kiwi/US," Imre Speizer, senior market strategist at Westpac, said.

"We were thinking up until two or three weeks ago that the decline would continue and that the currency would possibly get down to around US68c," he said.

"There were a number of things conspiring to make people feel pessimistic and that all faded by around the middle of March and then, with quite a sharp rebound, investors seemed to have regained their appetite," he said.

"On top of that, flows from reinsurers would have had some effect, but quantifying that is damn near impossible," he said.

Firm commodities prices have also acted to support the kiwi.

For once, monetary conditions are not playing a part in supporting the New Zealand dollar because the high yield-seeking international investors, using the so-called cash and carry trades, have sought greener pastures.

On this score, the kiwi has been usurped by the rampant Australian dollar and it's easy to see why. New Zealand's official cash rate stands at 2.5 per cent while Australia's is at 4.75 per cent.

So-called eurokiwi and uridashi bond issues, which are designed to give individual foreign investors exposure to domestic interest rates - and once a big part of the New Zealand dollar's popularity - have all but dried up. In March, eurokiwi and uridashi bond issuance stood at $205 million, compared with A$1.6 billion for the Australian dollar equivalent. This a major reversal of the situation in 2007-8, when New Zealand had the lion's share of this type of investment.

While the New Zealand dollar's resurgence against the US dollar will be of concern to exporters, the kiwi/aussie cross rate has been favourable for New Zealand businesses with Australian exposure.

The rate got to A72.5c on March 7 - its lowest since July 1992. It has since bounced back to around A73.5c but is still quite low by historical standards.

Westpac's Speizer expects the kiwi/US rate to keep climbing for now: "It should get up to at least US77c."