Kiwi charges down the bears

The export sector's recovery looks likely to be delayed further into next year, with currency experts saying the chances of the New Zealand dollar depreciating significantly between now and the end of the year have faded.

"Renewed strength in the currency over the past few months risks further delaying the export recovery we expect next year," Westpac chief economist Brendan O'Donovan said this week, just before the release of business confidence data that reflected inflation pressures within the economy sufficiently strong to worry the Reserve Bank.

Meanwhile, price competition between the major banks on fixed-term home loans has been flagged as a likely concern for the central bank because of its potential to breathe fresh life into the housing market.

Consequently, market expectations that the RBNZ will follow through with its September threat of a further rate rise have risen sharply.

The chances of a further rate hike either this month or in December are now priced at about 80 per cent, making the New Zealand dollar even more attractive to yield-seeking offshore currency investors.

The kiwi dollar has traded around US66c recently and is now up more than 10 per cent from a US59c June low. At the time it was widely expected to head to US55c or worse by the end of the year. Yesterday it closed at US66.01c, up US0.26c.

"In coming weeks we're going to remain around current levels," said Deutsche Bank's Sydney-based currency strategist John Horner.

"We see the RBNZ as hiking, more likely than not by the end of the year as inflationary pressures in the economy persist and because of the resilience of the domestic economy and the housing market in particular."

Horner expected the kiwi to trade between US65c and US67c short term.

"As we come closer to the end of the year we would be looking for some signs of weakening in the New Zealand economy to start showing up in the data flow and to see some modest weakening in the New Zealand dollar but expect any substantial down move to be a 2007 story rather than in the remainder of 2006."

BNZ this week altered its year end forecast from US61c to US63c but retained its view that the kiwi would be at US54c by the middle of 2007.

"Until markets become convinced the RBNZ will not need to hike rates further we cannot see the New Zealand dollar weakening significantly," said BNZ strategist Danica Hampton.

Earl White, of Bancorp Treasury Services, saw the kiwi trading in a US63c to US68c range over the next three months, with the risk it could head even higher.


Flying high

* Currency strategists are backing away from forecasts that the kiwi will resume its slide some time soon.

* Rising expectations of another Reserve Bank rate hike are underpinning the stubbornly buoyant "bird".

* That is likely to delay the hoped-for, export-led economic recovery further into next year.