By BRIAN FALLOW
WELLINGTON - The New Zealand dollar still faces short-term hurdles, but fundamental factors point to a rise, the National Bank says.
It has been near current levels three times in the past 15 years and recovered strongly each time, according to a commentary from the bank.
"Growth differentials appear to be driving global currencies at the moment," it says. "The US economy continues to expand strongly and is acting like a huge vortex to international capital. The Australian dollar, euro and sterling have all taken a hammering, with the euro dropping to all-time lows against the US dollar in early May."
In that context, the Reserve Bank's interest rate rise last week was rightly seen as negative for growth prospects, and therefore negative for the currency, the National Bank says.
It will remain weak until New Zealand's external accounts improve significantly, on the back of stronger exports and a slowdown in imports. Preliminary trade figures for April are due tomorrow.
There will also need to be signs that the US economy is slowing significantly, and the US dollar correcting from its recent highs against most other countries, in particular from New Zealand's perspective, the Australian dollar.
The New Zealand dollar, about US45.7c in late trading yesterday, is about 20 per cent below the National Bank's estimate of long-term fair value.
In nominal trade-weighed index terms its long-run average is around 60 (compared with 52 at the moment).
The currency has been near today's levels in 1975, 1984 and 1992. "In those periods the currency stayed below long-run average value for 2.5, 3 and 3.5 years respectively. But the bounce back when it came was sharp in each instance," the National Bank says.
WestpacTrust describes the recent slump in the currency as an over-reaction.
"The Reserve Bank is not choking the economy. GDP growth in the March quarter is estimated to be between 1 and 1.5 per cent, underpinned by a huge increase in domestic residential investment in the quarter."
Housing starts in the March quarter were up an unexpectedly strong 21 per cent on December.
Bank of New Zealand economists say though residential building has probably peaked, some of the slack in the coming quarter is likely to be taken up by commercial construction.
Meanwhile, Statistics New Zealand's first estimate of retail sales in April shows a scant 0.2 per cent rise from March.
"Taking the April estimate at face value and allowing for inflation growth in real consumer spending seems relatively sluggish," Deutsche Bank says.
Kiwi dollar expected to rise
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