KEY POINTS:
The New Zealand dollar retreated more than half a cent against the greenback after yesterday's Reserve Bank rate increase on accompanying remarks by Governor Alan Bollard that the hike may be the last in the current cycle.
However, after rebounding somewhat, the currency's future direction is far from
clear as Bollard may raise rates again if the economy refuses to roll over, while the contagion from US subprime home lending woes may yet hit global markets say currency strategists.
The kiwi dollar fell from US80.35c immediately before yesterday morning's rate announcement to as low as US79.53c before recovering to close at US79.91c.
But Bollard's comment that the four rate increases this year "will be sufficient to contain inflation" was tempered by the proviso that was conditional on a slowdown in domestic borrowing.
"That's consistent with our view," said Bank of New Zealand currency strategist Danica Hampton.
"We don't really know how quickly the economy will slow ... if we get a bit of soft data then that might provide a bit of downward momentum for the currency."
Hampton also pointed to concerns about the spreading impact of increasing mortgage defaults on US securities markets.
For the time being, the fall-out for currency markets had been limited to a sell-off of US dollars which saw the greenback plumb 15-year lows against the euro and a 25-year low against the kiwi dollar early this week.
However, Hampton believed there was potential for those concerns to spill across into general risk aversion on global markets.
That would see "carry trades" unwind, potentially sending the local currency sprawling.
"All things considered I'm a little bearish on the kiwi," said Hampton.
But Royal Bank of Canada currency strategist Sue Trinh believed the local currency was likely to remain well supported.
"In an environment where yield appetite still remains very firm, kiwi will still remain very attractive to the Japanese retail investor. Buying on dips is still our favourite strategy."
Like Hampton, she believed further rate increases were very much data dependent at this stage, "and the data to this point has continued to print on the high side, surprising the RBNZ".
Uncertain future for Kiwi
* The NZ dollar retreated yesterday after the Reserve Bank indicated it may have finished raising interest rates.
* However, currency strategists believe a further rate rise remains a possibility.
Meanwhile, rising defaults among higher-risk US home loans are impacting on US securities markets and the contagion may spread.
That could see the kiwi plummet as "carry trades", where money is borrowed in a low-interest economy like Japan to invest in a high interest one like New Zealand, unwind.