The New Zealand dollar hit its highest point since its float in 1985 yesterday, prompting talk that the Reserve Bank could intervene to thwart what has been a meteoric rise for the currency.
The kiwi yesterday hit US82.18c, exceeding its previous post-float high of US82.15c, set on March 14, 2008, against the backdrop of ongoing weakness in the US dollar, a forecast record payout from Fonterra, the likelihood of higher interest rates as the result of resurgent inflationary pressures, and a report suggesting Chinese investment interest in New Zealand was imminent.
The currency has rallied by a staggering US11c, (15.3 per cent) since mid-March.
Prime Minister John Key told a post-Cabinet news conference the exchange rate was a concern. "The reason, in my view, that the New Zealand dollar is trading at such high levels against the US [dollar] is because of the inherent weakness in the US [dollar]," Key, a former foreign exchange dealer, said.
Key said it was a good news, bad news story for many exporters. "There's an imported component of what they export so that price reduces," he said.
"For New Zealand consumers it takes the pressure off oil prices and imported goods, and for commodity-based exporters life is a bit more bearable because of high commodity prices."
He said the Reserve Bank had the power to intervene but that he had not had any discussions with it. "It wouldn't be appropriate for me to give them guidance."
The Prime Minister's view that the kiwi's strength was all US-led was not shared in the marketplace. Currency strategists said that while the weak US dollar was an important backdrop, the local currency was gaining momentum in its own right.
The kiwi had built up a head of steam last week, thanks to a stream of bullish economic data, and yesterday's merchandise trade data, which showed a surplus of $1.1 billion in April - the highest monthly surplus on record - was enough to tip the currency into uncharted territory.
"US dollar weakness [is] not the driver of the past two or weeks, it's really been about New Zealand fundamentals, so the improvement and the resilience of the economy here has been much better than would have been expected let's say a month after the (February 22) earthquake," Westpac senior market strategist Imre Speizer said.
Financial markets are coming around to the idea that interest rate rises from the Reserve Bank will come sooner rather than later, which is normally a green light for currency speculators.
"The prognosis for the week ahead is that we would expect it to go a few cents, at least, higher," Speizer said.
"The NZ fundamentals are very good," Speizer said. "I think they have taken people by surprise and I don't think the markets have fully reacted to them just yet," he said.
BNZ currency strategist Mike Jones said the US dollar was certainly a factor in the kiwi's rise. "But in equal part we have seen some positive news locally that has also contributed to the kiwi dollar's strength." On its own account, the currency has gained about 3Ac against the Aussie dollar over the past few weeks, and the Reserve Bank's Trade-Weighted Index, which measures the New Zealand dollar against the currencies of New Zealand's main trading partners, is at three-year highs.
Jones said there had been "talk around the traps" that the Reserve Bank could intervene to sell kiwi dollars to take the steam out of the rally. "But my own personal view is that they will not intervene at the moment," he said. "We are in uncharted territory, but our view is that the currency has probably got itself a little bit overstretched in the short term, and there will be a bit a pullback," he said.
"But equally we are warning exporters that it is not going to fall off a cliff any time soon, because of the prospect of rate hikes, a growing economy, and higher commodity prices. The high currency is something that exporters are just going to have to work around unfortunately," he said.
At the close of business, the kiwi had retreated to around 81.88USc.
- additional reporting NZPABy Jamie Gray