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The New Zealand dollar extended its slide against the Aussie but some market participants say it may reverse course and rise in the medium term if the Reserve Bank begins raising interest rates ahead of its counterpart across the Tasman.
The kiwi was trading at 92.77 Australian cents as at 5pm in Wellington from 92.85 cents late yesterday. The New Zealand dollar rose to 73.52 US cents versus 73.38 yesterday.
The kiwi fell against the Australian dollar yesterday after minutes of the last Reserve Bank of Australia meeting showed it had turned more upbeat on the economic outlook but "we don't think it has been entirely justified," said Bank of New Zealand senior strategist Jason Wong.
BNZ's current fair value estimate for the kiwi is a range of 94-to-95 Australian cents and "our medium-term track still has an upward bias, albeit more so for next year than the rest of 2017," said Wong. When comparing economic factors between the two nations, "New Zealand looks better placed when considering terms of trade, fiscal policy and capacity pressures that should ultimately lead to the RBNZ raising rates next year ahead of the RBA."
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Speeches by several RBA officials later this week and early next will be key for further direction.
The kiwi gained against the greenback overnight and the US dollar remained on the defensive after the collapse of the Republicans' attempt to overhaul US healthcare.
Still, Wong said while the kiwi is being supported by high risk appetite and record New Zealand terms of trade "we see the balance of risks weighed to the downside over the rest of the year." According to Wong, BNZ's trade-weighted index models show the greenback is oversold by 6 per cent.
"With speculative accounts broadly speaking short USD and long NZD, the hurdle rate for a reversal of fortunes is fairly low," he said. Key triggers would be some positive news on the US fiscal front or a better run of data that helps improve the odds of the US Federal Reserve continuing along its path of policy normalisation, he said.
On the flip side, while the RBNZ might move before the RBA, it was still decisively neutral. Also, New Zealand's September 23 general election is looking to be a tight contest, with a number of unknown variables. "Confidence could well dip ahead of the election data and as post-election negotiations get underway," he said.
The trade-weighted index rose to 77.86 from 77.76 yesterday. The kiwi rose to 56.42 British pence from 56.03 pence late yesterday and traded at 63.73 euro cents from 63.64 cents and rose to 82.38 yen from 82.21 yen. It was at 4.9680 yuan from 4.9618 yuan.
New Zealand's two-year swap rate fell 3 basis points to 2.18 while the 10-year swaps fell 6 basis points to 3.26 per cent.