KEY POINTS:
Having confounded the forecasts of most currency experts late last year by reversing its first-half retreat and finishing the year higher than it began, the New Zealand dollar has proved itself a fickle beast.
"Forecasting exchange rate movements will not be any easier this year," says ANZ dealer Alex Sinton.
This was demonstrated during the first week of trading this month, when the kiwi fell 3.4 per cent, he said.
Sinton believes it is far too early to start making detailed forecasts about the NZ dollar's moves this year, at least until it becomes more apparent how the economy is doing against other countries, and what the Reserve Bank is likely to do with interest rates.
He was waiting for Wednesday's inflation figures and the Reserve Bank's official cash rate review on January 25.
Money markets have priced in a 75 per cent chance that Governor Allan Bollard will lift interest rates by a quarter of a percentage point, and that has given the local currency support in recent weeks.
If the rate is not increased, the reaction could be interesting, says Earl White of Bancorp Treasury Services, one of the few experts not surprised by the kiwi's climb late last year.
The Reserve Bank would be mindful of recent falls in the price of crude oil, and the NZ dollar's unexpected trade-weighted index strength.
"Bollard's been looking for every reason not to [hike rates]. If he doesn't, we could see some short-term pressure earlier that everyone thinks."
But any early move down was likely to be limited by the currency's still considerable yield advantage over other currencies.
Sinton agrees, saying that even if the Reserve Bank stays put, there is still "a fairly wide gulf" between New Zealand short-term interest rates and those of other economies.
International markets were awash with investment money, and managers of that money were hardly likely to turn their back on the returns offered by NZ dollar investments.
BNZ currency strategist Danica Hampton believed yield demand would continue to underpin the kiwi.
"I still think we're going see a US67.5c to US69.5c range over the next couple of months."
The major themes on currency markets this year were likely to be slower US growth and a stronger Japanese yen.
"The Bank of Japan will probably lift rates further. Hopefully that will bring some unwinding of carry trades later in the year and then we'll see some moderation in the kiwi."
The "carry trade" is loans taken out in a low-yielding currency such as the yen to invest in a high-yielding one such as the kiwi.
Higher Japanese interest rates would reduce the interest rate differential between the yen and the kiwi.
That would also affect the related market for uridashis and eurokiwis - Japanese and European bonds denominated in New Zealand dollars which have helped keep the kiwi up.
It was widely believed that when substantial amounts of the bonds matured in the closing months of last year they would not be replaced with new issues, which would send the kiwi dollar sprawling.
"Last year everybody made a big song and dance about the eurokiwi and uridashi maturities," says White. "We managed to meet all the maturities last year and exceeded them over the last six months.
"There's a lot this year as well, but things may be a little bit more difficult if the perception is the Japanese are going to increase interest rates."
Hampton says uridashi maturities, which this year total $17 billion, peak in August with $3.5 billion due to mature and in October witth $3.9 billion.
"So there are potential downside risks for the kiwi especially if the outlook for issuing uridashis becomes less favourable by that time of the year."
The BNZ expects the NZ dollar to be below US60c by the end of the year and to bottom at US56c by mid-next year.
Sinton is much less bearish on the local currency's prospects.
"Unless the yield landscape shifted considerably, it would be difficult to see us under US60c, certainly for any length of time," he says.
That's despite ANZ economists predicting that the kiwi will be below US60c by October in response to Reserve Bank indications that it will start cutting interest rates.
Sinton believes the Reserve Bank would be loath to indicate its intention to cut interest rates until it is convinced it has inflation under control.
Bancorp's White believes the kiwi is likely to fall unless the US dollar is driven down by the market again, as it was late last year.
But he believes expectations about how far the kiwi is likely to fall should have been altered.
"People will be more inclined to buy on they way down rather than wait for the huge collapse."
He says the dollar's fall below US50c in the late 90s had created the expectation it might go as low again, but that drop was caused by an unusual set of circumstances including the Reserve Bank's overly swift rate cuts during the Asian crisis.
These days New Zealand's more robust economy is likely to prevent such a dramatic slide.
"I think if I see the kiwi dollar with a 5 on the front at any time this year I'm going to be pretty aggressive talking to my export clients to take some strategic long-term cover because in the big scheme of things those rates are cheap.
"I think at the moment around US60c is probably fair value, and I've got a sneaking suspicion fair value is continuing to creep up a little bit."
