By ELLEN READ
Bank forecasts show the New Zealand dollar strengthening to reach 47USc by the end of the year, but its short term prospects are more subdued.
Currency strategists say a combination of hesitancy about the pace of the United States recovery, a large amount of imminent Eurokiwi bond maturities and a weak Australian currency will weigh on the kiwi over the next few months.
The New Zealand dollar began the year around 41.6USc and despite hitting a high above 43USc during last month, fell back to end no higher than it began.
A Reuters poll of 11 banks gives an average New Zealand dollar forecast level of 42.9USc at the end of next month, rising to 46.94USc by the end of the year.
The short-term caution, for the next three or four months, can be attributed to several factors:
* The United States recovery, while still on track, has room to disappoint as the market has priced in a very ambitious recovery
* A large currency deficit resulting from merger activity in Australia has weakened the Aussie, and because the kiwi's fortunes are so closely linked to those of its transtasman cousin, the New Zealand dollar will feel the downward pressure
* More than $3 billion in Eurokiwi bonds will mature this year, $2.03 billion of them in the next six months.
These bond maturities have the potential to provide significant New Zealand dollar supply, particularly next month and in July.
But what concerns more than the amount maturing is the replacement rate, Westpac currency strategist Johnathan Bayley said.
Eurokiwis were popular between 1997 and 1999, but issuance had fallen over the past year.
Last year, Eurokiwi maturities of $2.9 billion were replaced by $1.05 billion in issuance, a replacement rate of 36 per cent.
"Although the current stabilisation in global activity is now bringing a pickup in peripheral market sentiment, we believe the replacement rate may fall further as demand for these issues remains weak," Mr Bayley said.
Assuming a replacement rate of 25 per cent, Eurokiwi maturities could provide net currency supply of up to $2.3 billion this year.
Bank of New Zealand currency strategist Stuart Ritson said the kiwi would not show much gain until the second half of the year.
"The US should be more on track by then and there won't be so many eurokiwis maturing."
Westpac is forecasting the kiwi to be nearer 48USc at the end of the year, but Mr Bayley said its range would ratchet higher, rather than progress smoothly upwards through a continued rally.
Foreign factors cause cautious outlook on kiwi
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