Kiwi up again as world talks of recovery

Misplaced or not, optimism the global economy is on the road to recovery has continued to drive the New Zealand dollar higher.

Yesterday, having punched through the US60c mark over the weekend after another day gains on Wall St on Friday, the New Zealand dollar reached higher still, just topping the US61c mark shortly after the local close yesterday, its highest level since December.

"Really, it is a global story," said BNZ currency strategist Danica Hampton.

"People have seen green shoots in the global economy and are convinced the world is on the road to recovery. We're seeing strong equity market demand, strong risk appetite and as people have ditched safe haven currencies like [the] US dollar they've piled into growth sensitive currencies like [the] kiwi."

Recent demand for the kiwi was strongest from short-term speculative investors looking to benefit from exchange rate movements rather than from yield seeking "real money accounts" she said.

The New Zealand sharemarket has also risen on this updraft of international market optimism, with the NZX-50 yesterday closing at 2829 having gained 17 per cent since hitting a five-year low in early March.

The big question, said Hampton, "is whether or not this rally is a bear market bounce or the start of a new uptrend".

"I just think the equity markets are overestimating the speed and strength of the recovery that can be expected."

Should the rally falter, expect the local currency to plunge once more.

"From a fundamental perspective [the] kiwi looks overstretched, but it's unlikely to see any significant weakness until we start to see that global picture change," said Hampton.

Currency strategists have been expecting this to happen for some time.

"We were anticipating a turn in risk sentiment last week, but were too early," Westpac senior markets strategist Imre Speizer said yesterday.

"While low New Zealand interest rates and still weak economic fundamentals argue for a weaker New Zealand dollar, global sentiment is the dominant factor."

New Zealand Institute for Economic Research economist Shamubeel Eaqub said the basis for the bullish sentiment was hardly solid, it was merely showing things were getting worse at a slower rate.

Hampton pointed out that US employment numbers released on Friday - which, because they were not as bad as expected, helped move US stocks higher - were the worst such data in almost quarter of a century.

Eaqub said there was still considerable uncertainty observed that bear market rallies or "stop start patterns" were a prominent feature of previous downturns. "We need to see a bit more data supporting the green shoots before we take a strong stance on a recovery view."

ANZ economists, while acknowledging the strength of the positive market trends clearly didn't see them as representing a turning point.

"We remain suspicious about the ability of so-called green shoots to manifest into a sustainable recovery ... we simply have not seen the improvements in key structural indicators to give us the confidence to start talking about a sustained and quality upturn."SEE ALSO

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