Economy set to gain from 7 per cent drop in NZ dollar in just a month in a month

Exports are set to get a boost from a weak NZ dollar. Picture/Hawke's Bay Today.

Experts predict Kiwi weakening against greenback could benefit NZ economy.

The Kiwi export sector as well the general economy looks set to gain fresh impetus from a New Zealand dollar that has fallen by 7 per cent against the all-important US dollar in just over a month, economists said.

The Kiwi's sharp decline against the greenback reflected what analysts said was renewed strength in the US dollar and a return to more "text-book" relativity between the markets now that US interest rates are on the rise after several years of being mired at abnormally low levels.

Higher US rates have kicked the US dollar back into life, putting the Kiwi dollar and other currencies in the dollar bloc under downward pressure.

A weaker local currency stimulates export earnings when US dollar-denominated earnings are repatriated into relatively more New Zealand dollars than when the currency is strong.

In the case of dairy giant Fonterra - New Zealand's biggest exporter - the substantially lower Kiwi will be supportive for farmgate milk prices, economists said.

The degree of the benefit will depend on the extent of Fonterra's currency hedging but ANZ senior strategist Phil Borkin said the weaker currency could translate into a farmgate milk price of near $7.00 a kg - which would be one of the highest yet - in the coming 2018/19 season, assuming world dairy prices remain stable.

More broadly, he said the terms of trade - which measure the value of a country's exports relative to its imports, could be further boosted from already record high levels.

"That low currency, together with higher commodity prices, is a pretty powerful stimulative force," he said.

"It is one of the reasons why we think the economy can record some decent periods of growth, despite the housing market cooling," he said.

Westpac senior market strategist Imre Speizer said most of the Kiwi's decline could be put down the US dollar flexing its muscles, but this month's monetary policy statement from the Reserve Bank probably probably added about US1c of weakness.

"It's mostly a US dollar phenomenon," he said. "We have seen markets behave in more of a text-book fashion," he said.

"The rise in US bond yields has followed the rise in the US Fed Funds rate," he said.

"The rise in the US dollar has followed the rise in US interest rates and the fall in the Kiwi has followed the rise in the US dollar, so that is all playing out as it should," he said.

Recent gains in the greeenback were in stark contrast to the preceding 12 months, when political and fiscal concerns tended keep a lid on the US currency.

"Now, these risks have either dissipated or have been fully priced in," he said.

Speizer said world currency markets were on their way towards working along traditional lines after years of unusually low interests introduced to combat the aftermath of the Global Financial Crisis had tended to thwart the usual trading patterns.

"Now we are back to watching the usual things that drive currencies, such as commodities prices and interest rates," Speizer said.

"Things have normalised in the sense that markets are relating to each other in a more typical fashion," he said.

"As long as that normality remains the case, the US dollar will continue to get stronger and, as it gets stronger, the NZ dollar will fall," Speizer said.

The New Zealand's official cash rate now sits a record low of 1.75 per cent - level pegging with the US Fed Funds rate.

If, as the market expects the US Federal Reserve to hike its fed funds rate again in June, it will be the first time since US official rates have exceeded New Zealand's since 2001.

Fonterra is set to issue its opening forecast for the 2018/19 season later this week.

The kiwi dollar traded at 68.84 US cents in late Friday trade, down US$5c from US73.8c just over a month ago.

U.S. benchmark 10-year yields hit a high of 3.128 percent on Friday, the highest since July 2011, on expectations that Fed will raise interest rates at least two more times this year.