KEY POINTS:
Currency watchers are sharply adjusting their forecasts of where the New Zealand dollar will bottom out next year - to around the US45c mark - as the outlook for the global and domestic economies continues to worsen.
In its Quarterly Economic Forecasts released late last week, ANZ Bank
picked the kiwi dollar to head towards US44c in the second half of next year as a painful but necessary part of the adjustment process for an ailing domestic economy.
"It will not be a smooth ride down. But the big picture points to the need for the New Zealand dollar to fall further and stay lower for longer to allow the external imbalances in the economy to adjust."
ANZ chief economist Cameron Bagrie said even taking a optimistic view 2009 was set to be a very tough year.
New Zealand's huge current account deficit - a measure of our indebtedness to the rest of the world - made the country particularly vulnerable to the effects of the credit crisis. A weaker currency was required to support the export sector, which in turn needed to perform strongly to reduce the current account deficit.
"The currency is going to be a big part of the rebalancing process."
The kiwi dollar's fall from over US80c in March to around US55c at present "represents one of, if not, the largest and steepest falls it has experienced in its post-float history," ANZ said.
Bagrie observed that the New Zealand dollar "always ends up going far higher than what we expect on the top side so we shouldn't be surprised to see it go far lower than we expect on the downside".
In August - before the most intense period of the credit crisis - the major banks were forecasting the kiwi to be trading at somewhere between US65c and US70c by the end of the year. Last month those forecasts were revised to the low 50s.
Westpac market strategist Imre Speizer said his bank was now picking the kiwi dollar to be trading at US45c some time late in the first quarter or early in the second quarter of next year.
He said much of the change in forecast was driven by the increasingly gloomy outlook for the international economy and therefore demand for New Zealand's exports.
"Suffice to say economic conditions have deteriorated, forecasts are being slashed week by week so that's the thinking behind this."
In the short term, Westpac had "a slight positive bias" for the kiwi dollar in anticipation of relatively benign local economic data stemming from lower petrol prices and tax cuts.
The NZ dollar closed at US55.35c last night, up from US55.03c on Friday.
