Renewed international enthusiasm for the kiwi dollar looks likely to accelerate New Zealand's economic slowdown this year, currency experts say.
The kiwi defied expectations of continuing the fall it began this year to be the best performing currency in the world last month. It was trading at US65.5c yesterday.
The kiwi had fallen dramatically in the first six months - hitting US59c in June - sparking hopes that an export-led recovery would ensure a soft landing for the economy.
But since then, it has undergone a revival, despite New Zealand's more gloomy economic outlook.
Currency traders said the kiwi was no longer underpinned by economic fundamentals and was again being driven by international investors attracted to the high interest rates.
"We're up the best part of 5 or 6 per cent at a time when all the evidence points to a slowing economy," said ANZ head of markets John Body.
The currency was clearly in "overshoot" mode, he said.
"We expected a bounce in the currency but we didn't expect it to be so pronounced. We were comfortable with it bouncing to 64c against the US and maybe 84c Aussie," he said.
Against the Australian dollar, the kiwi was at A85.4c over the weekend.
Body said the kiwi's rise was increasing the risk the economy could contract in either the September or December quarter.
Body now expected just 1 to 1.5 per cent growth in 2007.
"It will certainly reduce the contribution of the export sector to economic growth ... They've got freight costs, high labour costs, high domestic energy costs and now they've got a strong currency again.
"At 66c you can only call the kiwi strong. There is no other word for it."
Sue Trinh, senior currency trader at RBC Capital Markets, said that, adding to that concern, the New Zealand dollar had been rising at a time when commodity prices had softened.
If international investors were interested in the fundamentals of the economy, that should have been a trigger for renewed weakness in the kiwi, she said. It appeared that global investors' risk appetites had risen.
Body said three key issues were driving the rise.
The first was that the US Federal Reserve had put its interest rates on hold. That meant the premium of New Zealand's interest rates over US interest remained attractive to many investors.
The second was the relative weakness of economic data from Japan in the last three weeks.
Japanese investors have been some of the biggest buyers of the kiwi over the past few years.
"The view that Japan was starting to grow and investors there would look for domestic investments has weakened," Body said. "So Japanese investors are once again chasing international yields, putting pressure on the kiwi."
The third factor is that key New Zealand economic data had been inconsistent over the past few months, and it had not been as weak as was expected.
Currency traders had "shorted" the kiwi - selling out on the basis that the economy was weakening. Now some were coming back in as it became clear that New Zealand's Reserve Bank was not likely to lower the official cash rate this year.
"The long-term trend is still downwards ... that is driven by the macroeconomics," Body said. "But we now risk slowing at a faster pace than the RBNZ had hoped for."
The renewed rise is causing fresh anxiety among exporters.
"We're very disappointed it's trended upwards," said Tony Egan, chief executive of meat exporter Affco. "While it has been volatile lately it had struggled to pass the US64c barrier. It has gone higher and we just have to hope it's an aberration not a trend."
Affco's peak export season was from December through to July. Egan hoped the kiwi would have started to drop by then.
RBCs Trinh said she had revised her short-term forecasts moderately higher, but she was not expecting the rise of the last month to be sustainable.
By the end of the third quarter she was now expecting to see the kiwi at US62c (the previous forecast was US61c) and by the end of the year she expected to see it at US60c (as opposed to a previous forecast of 59c).
Investors drive kiwi up again
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