By ELLEN READ
Upbeat talk on the United States economy has buoyed the US dollar - and in turn sent the kiwi into a tailspin.
Any threat of deflation in the US economy was over, Federal Reserve chairman Alan Greenspan said yesterday, raising the prospect of an early interest rate hike.
The kiwi tumbled after the news as the greenback rose, and was still heading lower overnight. The local currency was at 62.4USc at 5pm, down 1.7USc from 64.1USc on Tuesday and at its lowest point in five months.
"[Greenspan's] really opened the door up for bringing the US rate hike cycle forward," said ANZ director of foreign exchange John Body.
This had hit the high-yielding currencies, such as the New Zealand and Australian dollars, as it indicated the gap between US interest rates and those Downunder would narrow more quickly than expected.
"So those who are long on kiwi are starting to liquefy their positions. And as we know from kiwi historically, when people are trying to exit their positions quickly we get volatile movements because the underlying liquidity of kiwi is relatively poor," said Body.
Greenspan was scheduled to speak publicly again early this morning at the Joint Economic Committee and was expected to reinforce yesterday's message.
"He's certainly of a mind to set the market up for the Fed to move rates up. The Fed have always taken the approach of trying to telegraph rate moves, they've never liked for their actions to be a surprise in the market," Body said.
The US benchmark rate is 1 per cent.
Traditionally, US Fed tightening cycles coincided with a weaker US dollar so while the kneejerk reaction was for a stronger greenback, if Fed tightening led to a weaker US equity market, the medium term outlook for the US currency would be downward.
"Long-term this could be the base being created for the next move higher [in the kiwi]," Body said.
"We're still of a view that we could see a low down to 60USc but we don't rule out a return to the high 60s in the second half of the year."
The kiwi is also weaker against other currencies.
"We're down just above 85Ac now. So we're starting to return to the 80Ac to 85Ac level which most of us consider to be fair value," Body said.
The fall against the aussie was in part a reaction to yesterday's migration data - which showed softer than expected figures.
If net migration was not going to drive the local economy, it would take a lot of pressure off the Reserve Bank to raise interest rates so the chances of increasing the yield differential against the Australian dollar reduced, Body said.
Johnathan Bayley, Westpac's senior currency strategist, said the cross rate was likely to continue lower as expectations of an interest rate rise in New Zealand softened, although momentum would be limited ahead of the official cash rate review on April 29.
Most economists are picking the central bank will hold the official cash rate at 5.25 per cent.
Kiwi dollar takes tumble after US rally
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