Kiwi tipped to fly higher after topping US65c

The New Zealand dollar rose to new multi-month highs against the US dollar yesterday as the greenback's weakness deepened.

The kiwi reached US65.65c around 6am yesterday, its highest against the US currency since September 3 last year, but it eased over the course of the session to close at US64.80c. This morning it was at US65.87c.

Currency analyst Derek Rankin of Rankin Treasury Advisory, who for some time has predicted continued gains by the local unit against the US dollar even as other commentators insisted New Zealand's economic fundamentals didn't justify current levels, said those same fundamentals "don't really matter".

"It's what's going on in the US dollar that really matters."

"The New Zealand dollar's gone up a bit too fast but the trend is what it is."

Rankin said given the speed of the kiwi's gains, a pullback towards US62c to US63c was on the cards, but the general trend higher would remain in place and US70c was likely later this year.

"I just think that things are gradually getting better out there when a lot of these economists are focusing on all the negative stuff."

A number of economists and other commentators were clearly suspicious of the rallies in equities and commodity prices.

"This suspicion is based on the reality that property values are falling, unemployment is rising, consumer confidence is poor and therefore as a result, consumer demand, which drives all markets, must remain weak, at least in the medium term.

"The second camp, which we are in, believes that the extreme negativism seen from October 2008 to March 2009 is abating. The 'green shoots' concept, in that economic data will move from bad, to patchy, to good seems reasonable to us.

"That means that economic news will get better, confidence will grow, and demand will build. That seems to be happening now, with equities rallying, and demand for commodities lifting prices ... I think that's all building a picture which is basically good news out there."

Brighter economic prospects were causing long-term US interest rates to rise which US authorities did not want. They were likely to tackle this by buying more US Treasuries, effectively printing more US dollars to fund this which in turn debased the greenback.

This was paving the way for gains by the euro and in turn the Australian and New Zealand dollars.

While the majority of the kiwi's gains were down to US dollar weakness, Rankin said its rise against other currencies was also significant.

"I go back to the argument that we have 5 per cent or more triple A government bonds with a now stable credit rating."

He pointed to the kiwi's 18 per cent rise against Japan's yen since the start of the year to 62.50 yesterday as demonstrating the appeal of the kiwi to overseas investors.

Meanwhile BNZ economist Craig Ebert suggested international investors were overestimating the local economy's ability to sustain such high levels in the currency.

"As per normal the New Zealand dollar will spend 44 weeks a year grinding higher and eight weeks in free fall.

"The currency is at elevated levels and though there are still shorts [bets it will fall] in the market, the people that are long are not long-term holders. A turn in equities or commodities, both of which are near their 200-day moving average, could inspire one of those eight week [periods] to occur."