Kiwi headed for 72USc, dealers say

Boosted by yesterday's Reserve Bank rate hike and accompanying hawkish statement from Governor Alan Bollard, the kiwi dollar had found fresh support from overseas investors and appeared headed for 72USc, dealers said

But currency strategists are mindful New Zealand's economic woes mean the kiwi is over-valued.

Immediately after yesterday's quarter of a percentage point move, taking the official cash rate to 7 per cent, the kiwi drifted below 70USc but, by the end the day, foreign demand pushed it back up and it closed at 70.54USc.

Greg Gibbs, a senior currency strategist at RBC Capital Markets in Sydney, said the kiwi was seeing strong investor inflows from abroad attracted by the highest interest rates in the industrialised world, "and there's little indication in the statement to suggest rates are going down".

BNZ currency strategist Sue Trinh said October had been "a banner month" for the kiwi with issuance of both eurokiwi and uridashi bonds of about $4.4 billion.

Gibbs said the recent softening of the yen was evidence of outflows of funds from Japan into high-yielding currencies like the kiwi, which is now at its highest level against the yen since 1997.

While the US dollar was also increasingly seen as a high yielder as the Federal Reserve continued to tighten, the greenback had been under pressure in recent sessions.

"So there's every possibility the NZ dollar again approaches 72USc, notwithstanding the RBNZ's attempts to talk the currency down," said Gibbs.

The "global savings glut" meant there was a lot of money chasing high yields and the investor flows supporting the kiwi were looking "pretty durable", he said.

But Westpac currency strategist Johnathan Bayley has not changed his bearish outlook on the kiwi's medium-term prospects.

He said "real money investors" and speculative investors driven by macroeconomics rather than market trends were looking through the yield issue at the bigger picture.

With inflation on its way to 4 per cent, economic growth slowing, and the Reserve Bank continuing to raise rates relatively late in the cycle, "that's not exactly a recipe for a strong currency".

BNZ's Trinh said: "Everyone is in agreement that the kiwi has to suffer a medium-term adjustment lower ... I think that's more of a story for 2006 than 2005."