When the dollar starts to drop, it will sink like a stone.
There'll be no gentle and ordered decline. Before we know it the kiwi will be back under 60USc.
The kiwi dollar is a minnow on global currency markets and can easily be pushed around by giant international investors - and they're about to push it down.
Around $1.5 billion of kiwi dollars is traded on currency markets each day. But this is barely a drop in the ocean when compared with the US$600 billion worth of currencies traded around the world, according to the Bank of International Settlements.
What this low volume of trade means is that when large numbers of international investors start selling the kiwi all at the same time, they flood the market and there's no one to buy it. The dollar will sink quickly and it could happen any day now.
Global hedge funds are planning to sell huge amounts of the currency and, when they really get going, there'll be nothing to stand in the way of the kiwi's fall.
Hedge funds are essentially aggressive investment funds that can make short-term, highly leveraged investments for huge profits.
The funds try to make money on the falling kiwi by borrowing New Zealand dollars, then selling them in the foreign-exchange market. After the kiwi has fallen (they hope), they buy back the same amount of New Zealand dollars they sold, but it costs them less, so they pocket the difference.
For instance, if a hedge fund sells $100 million worth of New Zealand dollars - and trades that size aren't unusual - and the kiwi drops 3USc, then the fund makes US$3 million, minus some interest costs.
That's pretty good money for a trade that might only take a few weeks and it's easy to see why the hedge funds are piling in.
They're seeking to cash in on the trend of the falling kiwi and, in doing so, will ensure the kiwi will fall faster and further as they continue to sell the currency.
The fall has been a long time coming. For the past couple of years, the local dollar has been one of the world's most overvalued currencies because the slowing economy wasn't strong enough to justify its high level. But demand for the kiwi has been underpinned by Japanese and European investors buying New Zealand dollar bonds - uridashis and eurokiwis - to get access to the high interest rates available here.
A couple of weeks ago, however, weak jobs and retail figures finally gave foreign investors the evidence they were looking for that the New Zealand economy was slowing enough to let Alan Bollard start cutting interest rates, probably later this year.
Lower interest rates mean investors get a lower return for their kiwi dollars and so are likely to sell the currency and put their money somewhere else.
The kiwi won't fall in a straight line. It will bounce up and down, but much more down than up.
And with a couple of steep drops, the dollar will almost certainly be much nearer its long-run average of 58USc by the end of the year.
* Christopher Niesche is business editor of the Herald.
<EM>Christopher Niesche:</EM> Kiwi's dive to be hard and fast
AdvertisementAdvertise with NZME.