KEY POINTS:
The New Zealand dollar has remained strong for long enough to change perceptions as to how much it is worth, Bank of NZ currency strategist Danica Hampton says.
The currency ended the month on Friday at US71.3c. It has spent a good part of this year in the late 60s to early 70s, compared with its post-1984 float average of 58.5c.
"People are really interested in the idea that perhaps 'fair value' of the currency has probably increased," Hampton says.
Purchasing power parity - an economic model comparing inflation rates between countries - suggests a long-run average value for the kiwi of 60 to 60.5c, she says.
However, the currency has shown that it can fluctuate quite wildly.
"But from a shorter term perspective, commodity prices, interest rates and the appetite for risk, do suggest that fair value for the kiwi has increased quite a bit over the last couple of months," Hampton says.
Using that same criteria, fair value suggested a range of 68.20 to 70.70 cents, she says.
Hampton says March's price action probably had more to do with carry trades - when speculators borrow in currencies charging very low interest rates to invest in high yielding New Zealand dollar assets.
Early March saw the unwinding of those carry trades, which saw the currency taken to its low for the month of 67.23 cents. The rally since then has reflected those investors rebuilding their New Zealand dollar investments.
Hampton says that while that explains some of the recent appreciation, the currency has gone too far.
"There are a lot of fundamental factors that suggest the currency should be high, but at the same time we have seen the market get a bit carried away."
"We have got speculative positions in the kiwi at extreme levels and we have also seen the market price in a very optimistic scenario for New Zealand."
A big part of the New Zealand dollar's strength has been the US dollar's weakness, and a turnaround in the greenback will quickly deflate the kiwi.
A slowing NZ economy will peg back the currency loses its impetus, but the Bank of NZ does not expect that to happen until late next year.
And the currency has a big black mark hanging over it in the form of the country's large current account deficit: 9 per cent of GDP last year.