Experts pick kiwi to keep on flying

The New Zealand dollar's rapid rise is likely to continue, currency experts say.

The kiwi leapt a cent to US66.59c last week, fuelled by the Reserve Bank saying another interest rate increase may be necessary to control inflation.

The prospect that the dollar may rise further is not good news for exporters.

Most did not insure against the resurgent kiwi's effect on export prices by buying foreign currency as a hedge when it reached its lows in June, because they were told it would continue to fall.

Even before the Reserve Bank's statement, the currency was extending the gains it has made since briefly dipping below the US60c mark. Yesterday it closed at US66.15c.

ANZ Bank economists said yesterday that the resilience of the economy and hawkishness from the Reserve Bank had been a surprise, and had lit a fire under the kiwi.

The bank's head of markets, John Body, said: "Given that we've strengthened by 10 per cent in three months, there's going to come a point where you've got to say this is an uptrend not a correction."

He believed the medium term economic picture "unquestionably" pointed to a lower kiwi at some point, but the threat of a significant tightening cycle by the Reserve Bank could cause the dollar to strengthen in anticipation.

"I suspect the uptrend would extend further. I certainly see the kiwi lower in three months, but we're going to extend beyond what we previously thought on the upside."

Body repeated the warning he gave this month that the longer the currency remained at around US66c or higher, the more likely the prospect of a hard landing next year.

It would cause problems for exporters, and would affect tourism by making New Zealand a relatively expensive destination.

Exacerbating the potential economic downside of the dollar's recent gains was the fact that foreign exchange cover taken by exporters over the last three months had been negligible.

"When you have both the banking community and also the central bank all forecasting a lower currency it's not an environment where exporters who have struggled with a strong currency for a long time are apt to be aggressive in their hedging requirements."

Export New Zealand chief executive Bob Walters agreed.

"I would say exporters probably have been wrong footed by most of the advisers," he said.

"Was there any expectation from anywhere or any signal that it was likely to creep up around where we are today? I'd say the answer was no."

Body and other currency experts said the kiwi's rise over the past two months had much to do with the re-emergence of yield as a major theme on international currency markets.

New Zealand had one of the highest official interest rates in the developed world, and the prospect of another Reserve Bank rate rise made New Zealand dollar assets more attractive to international currency investors.

Bankcorp Treasury Services director Jon Clarke said the yield story had been underestimated by local markets, which had focused on pessimism from economists and the "tsunami of uridashi redemptions" which would bring the kiwi down as overseas investors withdrew their money.

But "the weight of money is still flowing this way at the moment".

Like Body, Clarke believed that a bout of US dollar weakness could force the kiwi higher again.

Bank of New Zealand currency strategist Danica Hampton expected the kiwi would consolidate in a US65.50c to US66.90c band.

He expected it to be at US64c by the end of the month, US61c by the end of the year and US54c by next June.