Foreigners still like high-flying kiwi

Overseas investors have found a renewed appetite for the New Zealand dollar, offsetting the long-awaited rush of foreign capital flowing out of the country which was tipped to drag the kiwi dollar below US60c this year.

As a result of increased bond issuance to foreign investors, the kiwi has gained nearly 10 per cent since falling below US60c in June to close at US64.97c yesterday and is unlikely to fall sharply this year, currency forecasters say.

As recently as August some commentators were tipping that investors with as much as $11.5 billion worth of New Zealand dollar-denominated investments in the form of uridashi and eurokiwi bonds would take their money home when their investments matured in the second half of the year.

It was believed that withdrawal of cash would speed the dollar's descent.

However, the Reserve Bank recently raised the prospect that it may hike interest rates again while central banks around the world have signalled a less aggressive stance. As a result, the dollar is again in favour.

BNZ currency strategist Danica Hampton said there had been a pick-up in uridashi and eurokiwi issuance during August and last month, "and we've seen that more than offset the amount of maturities".

Last month $880 million worth of uridashis and eurokiwis - New Zealand-dollar bonds issued to Japanese and European retail investors - matured but there was $1.3 billion worth of new issuance. August also saw issuance over $1 billion.

Hampton said the pick-up in issuance was driven by international currency investors' renewed appetite for high-yielding currencies like the NZ dollar and the related re-emergence of the "carry" trade, where money is borrowed in low-yielding currencies to invest in high-yielding ones.

Although there were relatively hefty maturities scheduled for the rest of the year, including $962 million this month and $1.45 billion in December, issuance was expected to continue to offset that and to support the kiwi.

That could change in the second half of next year when the large flows of maturities started to come through, said Hampton.

The big months would be August and October, each with $3.7 billion worth of maturities.

Westpac currency strategist Michael Gordon said the story of increasing maturities had been well recognised for some time and the market was getting used to it. "In terms of the issuance, it's really a matter of the conditions for further issuance really improving."

Gordon said the retail investors, who were the buyers of uridashis and eurokiwis, were looking for "a good yield advantage and potential for gains in the currency and both of those have started to be much better recently compared with six months ago".