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The New Zealand dollar is on its way to US80c, foreign exchange traders said, after the currency climbed above US78c for the first time in more than two decades yesterday.
"There looks to be no stopping this train," said RBC Capital Markets currency strategist Sue Trinh, after the kiwi climbed to US78.35c - its highest level in the 22 years it has been a free floating currency.
Another suspected intervention by the Reserve Bank yesterday morning pushed the currency briefly below US78c, but the kiwi spent most of yesterday hovering above US78c, near the overnight high. It closed at US78.12c.
The currency also hit 75.56 against the trade-weighted index - just a shade above the previous high in December 2005.
Trinh said she expected the kiwi to hit US82c by the end of September.
She said the currency market was underestimating the chance that the Reserve Bank would raise interest rates again.
Such a move would make the currency even more attractive to investors seeking the high yields available in New Zealand.
"If the RBNZ is really serious about getting on top of domestic demand, it will have to hike further, but the market's not priced for it," she said. This meant a rate rise would likely cause the currency to rise a further US2c or US3c.
"Quite apart from any kiwi-specific factor, the mere fact that the US dollar is also weakening is likely to support the kiwi rallying to fresh highs," she said.
ANZ currency dealer Alex Sinton said US dollar weakness against a range of currencies and demand for yield currencies pushed the kiwi up to its fresh highs overnight.
He said the kiwi could rise to US80c as soon as this week depending on US housing data overnight.
Deutsche Bank currency strategist John Horner agreed the kiwi could hit US80c over the next few weeks, but said any gains would be short lived.
"In the short-term, momentum is such that [US80c] could well be seen, but we don't think those levels are sustainable," he said.
The strength of the kiwi and the higher interest rates this year were likely to slow the economy and cause the kiwi to drop over the next few months.
Horner said he expected the New Zealand dollar to be around US68c by the end of the year.
The Reserve Bank is believed to have intervened in the currency market again yesterday around 9am, when in the space of 10 minutes the kiwi dropped from US78.21c to US77.93c.
However, one observer questioned whether the Reserve Bank did intervene, given how shortlived the dip in the currency was.
Aside from the first time it used its power to intervene in the currency market to try to push the kiwi down last month, the central bank has not confirmed whether any further interventions have taken place.
Even high commodity prices, including record prices for dairy products, did not justify a kiwi above US70c, said ANZ head of foreign exchange, John Body.
"That's the type of comment you get at the top of a bull market where people are trying to find reasons to justify the strength."
In a bull market, the sharpest move comes in the shortest space of time, and can mark an "impulsive end".
"This may not be the exact top but somewhere between here and US80c the kiwi is going to run out of steam, if the economy doesn't run out of steam first," said Mr Body.
A kiwi at US80c and A91c against the Australian dollar was not sustainable for the economy, and could in itself trigger an economic correction as exporters, the tourism industry and manufacturers suffered damage.
The Reserve Bank has been so concerned about the currency's "exceptional and unjustified" levels that it intervened last month for the first time since floating the NZ dollar. Selling the currency on at least one occasion had only a short-term effect, and the central bank has said it will not defend a certain level.
"The only way for the kiwi to go down materially is by interest rates to go down," Mr Body said.
The Reserve Bank's benchmark rate is at 8 per cent following three consecutive interest rate rises, compared with 5.25 per cent in the United States, 6.25 per cent in Australia, and the European Central Bank's 4 per cent.
The country ignored at its peril a shrinking manufacturing sector, with the departure and downsizing of companies and loss of research and development overseas, said Canterbury Manufacturers' Association chief executive John Walley.
"What we're actually seeing now is a good number of the offshore owned companies are packing up and going somewhere else -- Electrolux, Dynamic Controls, GL Bowron, Gale Pacific -- and they act like a litmus test, they are the canaries, there's no sentimentality in their decisions," Mr Walley said.
"When it's local-owned there's always some local sentiment, but there's no sentiment when the owners are based somewhere else, and they are the ones who are quitting in droves.
"The higher the kiwi gets the more that's going to happen."
New Zealand's small and open economy could not afford to be out of step with the rest of the world when it came to interest rates, he said.
"Essentially we have to find a way of controlling domestic inflation that doesn't crucify the export sector."
- additional reporting by NZPA
