KEY POINTS:
The New Zealand dollar is soaring again, pushing through the US76c barrier yesterday on strong local data and a weakening greenback.
The kiwi closed on an eight-week high of US76.54c and the trade weighted index reached 71.66, its highest finish since August 12.
With the struggling US dollar providing a substantial tailwind, Friday's stronger than expected local gross domestic product number has given the kiwi a fresh boost and it has now gained more than a cent against the US dollar since the data was released.
After falling US15c in little more than three weeks to a low of US66.70c during the depths of the sub-prime crisis, some analysts are not ruling out a move by the kiwi above US80c.
Bank of New Zealand currency strategist Danica Hampton said the US Federal Reserve Bank's interest rate cut on September 19 was pivotal.
"It instilled investors with a lot of confidence so we saw risk appetite improve dramatically, and so too the appetite for carry trades and the New Zealand dollar."
Furthermore, the lower yield on offer in US dollar assets had seen investors seek alternative investments, "and there's been a 'sell US' story come through".
Since then the US dollar has sunk to a series of lows against a swathe of currencies including the euro, the pound sterling and the aussie, "and the kiwi has been dragged along".
However, Hampton believed forex markets had changed since the sub-prime crisis spread from Wall St to trigger a global credit crunch. Carry traders who borrow in a low-yielding currency like the yen to invest in a high-yielding one like the kiwi were unlikely to be as active.
"It's too soon to say we're out of the woods, so I don't think we're going to see the leveraged players pile into the carry trade like we saw in the past and I think that will keep the kiwi from the extra frothiness on top."
BNZ has revised its short-term fair value measure for the kiwi to a US74.80c to US76.80c range.
"It's headed up towards the upper end but I can't see it breaking substantially above that.
"It probably has a little further to run this week but I don't think we're going to see it head back to the highs we saw in July."
BNZ economists don't believe Friday's data pave the way for further RBNZ rate increases, "but we're unlikely to have interest rate cuts for some time.
"Our year-end forecast is US76c. The big picture is we're going sideways for the rest of the year."
Westpac currency strategist Michael Gordon agreed the theme for the kiwi over the past few weeks had been improving investor confidence and US dollar weakness.
"The question going forward is how much longer can the US dollar's decline continue?
"While the environment is not great for the US dollar, it's getting to the point where opinion is almost all one way against the currency, which is usually a sign people are in danger of getting caught out."
Westpac believes further RBNZ rate rises are an increasing prospect.
"A few more decent pieces of data and you'll see sentiment turn away from rate cuts soon and that will help the yield differential further."
Westpac is forecasting the kiwi to be trading in "the high seventies" by year's end.
"It's likely that we'll have a track that ends up over US80c again, the question is timing. If it does go over US80c the risk is it happens earlier than we expect."
Derek Rankin of Bancorp Treasury Services also believed the kiwi's rebound probably had further to run.
"You'd have to argue that now we've got above US75c, the target is back toward the US80c area."
While the kiwi's rise could be curbed by further bad news from the US on the sub-prime front, increasingly the losses suffered by players involved had been factored in.
The aussie had benefited most from the movement of money back into high-yielding currencies but "as things calm down and people are more willing to accept risk, then the New Zealand dollar is starting to come back into favour again".
What Next?
Year end forecasts for the NZ dollar:
ANZ - US72c
Westpac - "High seventies"
BNZ - US76c
