NZ dollar hostage to Fed rate hike

When will US Federal Reserve chairwoman Janet Yellen start to raise official rates? Photo / Getty Images

Will they or won't they? That's the question that has been on investors' minds for the best part of two years as they try to guess when the US Federal Reserve chairwoman Janet Yellen will finally start to raise official rates.

When that happens, it means US regulators will be confident that the world's biggest economy is on the right path after years of monetary moves to try to shake off a post-Global Financial Crisis hangover.

According to the Federal Reserve's Beige Book, which provides a snapshot of economic conditions in the Fed's 12 districts, most of the United States is experiencing solid growth, with only the energy sector proving a drag.

But the latest jobs report showing the US economy added 173,000 jobs in August - fewer than expected - failed to give Fed watchers much of a clue as to what the central bank will do when officials meet to consider policy next week.

However, the commonly held view is that the US central bank will make its move before the year is out, which is likely to put upward pressure on the greenback and more downward pressure on the NZ dollar.

Based on Friday's closing level of US63.59c, the kiwi has dropped by 28 per cent since piercing US88c a little over a year ago - driven down by prospects of a rate hike by the Fed, coupled with the start of the Reserve Bank's easing cycle here and sharply lower dairy prices.

Economists are close to unanimous that the Reserve Bank chairman Graeme Wheeler will cut its rate by 25 basis points on Thursday when the bank issues its official cash rate review, but there is conjecture about what happens with interest rates after that.

Regardless, currency strategists said the driver of the Kiwi dollar will still be the Fed's next course of action.

Most banks expect the New Zealand dollar to fall further before the year is out.

Imre Speizer, senior markets strategist at Westpac, said the Fed's next move would be pivotal. Opinions vary as to how much lower the kiwi will go - ANZ's house view is that the currency will reach US61c by the end of the year and US59c by March next year.

Westpac and BNZ expect to see the kiwi reach US62c by the end of the year but Westpac is at the more pessimistic end of the spectrum in terms of its expected interest rate track.

The bank expects the rate to fall to 2 per cent by early next year.

The prospect of a Fed rate hike has been a significant driver of the New Zealand dollar over the past year at least, said Raiko Shareef, currency strategist at BNZ.

"Now the debate is more around whether the market has got ahead of itself as people try and guess when that [US] rate hike will occur," Shareef said.

"We still think there is a bit more juice left in this US dollar rally."