Kiwi has further to go - analysts

Overseas analysts continue to tip further gains for the New Zealand dollar, based on the belief the Reserve Bank will lift interest rates sooner than it has previously indicated.

However, some market pricing suggests investors are now slightly less convinced governor Alan Bollard will have to eat his words and begin increasing the official cash rate before "the latter part of 2010".

Bloomberg reports investors are betting interest-rate increases from Oslo to Wellington will provide the biggest boost to this quarter's strongest currencies. The Norwegian krone and New Zealand dollar have gained about 11 per cent against the US dollar since June 30, the best among the 16 most-traded currencies, following their worst slumps since at least 1993.

Rising oil prices helped Norway. New Zealand benefited from accelerating growth in Australia, its biggest market.

Median economist estimates in Bloomberg surveys show Norway and New Zealand raising rates faster, more or higher than the US Federal Reserve and the European Central Bank.

"The market is beginning to focus on more traditional drivers of currencies such as interest-rate prospects," said Adam Cole, head of global foreign exchange strategy in London at RBC Capital Markets, a unit of Canada's biggest lender. It was a "debate about which central bank will be the first to hike", he said.

Closer to home, RBC's Sydney currency strategist Sue Trinh yesterday told the Business Herald the Reserve Bank's indication it would keep rates at the current level or potentially lower right until late 2010 "is a threat that we have never thought credible".

"Accordingly our view has been it would have to hike rates sooner rather than later and that is keeping the kiwi well underpinned accordingly."

But not everyone is bullish. Geoffrey Yu, a foreign-exchange strategist with UBS AG in Zurich, predicted the krone and kiwi would fall 12 per cent and almost 17 per cent, respectively, against the US dollar by year's end, given the "fragile" global recovery. Nevertheless, forex investors are stepping up bets the Reserve Bank will lift its benchmark cash rate sooner rather than later.

The kiwi hit a 13-month high versus the US dollar on September 23 on news gross domestic product grew 0.1 per cent in the three months to June 30, the first expansion in seven quarters.

Bollard left the key rate at a record low of 2.5 per cent on September 10. He said the kiwi's gains were "undesirable" in an export-led recovery.

"We expect the Reserve Bank to begin raising rates relatively quickly in the second half of next year," Greg Gibbs, a Sydney currency strategist with Royal Bank of Scotland, wrote in a September 17 report. The OCR would rise two percentage points to 4.5 per cent by the end of 2010, he said.

Interest-rate swaps indicate policymakers will lift borrowing costs by more than 1.5 percentage points within the next 12 months, an index compiled by Credit Suisse in Zurich shows.

However, Wellington Westpac market strategist Imre Speizer observed that recent interest rate swap pricing suggested some moderation of expectations around the timing and pace of Reserve Bank hikes.

Before the bank's September Monetary Policy Statement, the overnight interest swaps market was pricing in a 25-point hike in March and then 50 more points in April, "now they're pricing 25 in March and 25 in April".

Yu said the kiwi's gains might be curbed by worry aggressive interest-rate increases would harm exports to Australia, where the benchmark rate of 3 per cent is 0.5 per cent higher than New Zealand's.

BNP says the gains will continue, with the kiwi strengthening 2.4 per cent to US74c by December 31.

Deutsche Bank's Henrik Gullberg sees it rising 7.3 per cent to US77.5c. "If I could pick two major currencies to buy into the year-end, they would be the NZ dollar and Norway's krone."

- BLOOMBERG, STAFF REPORTER