Weak kiwi tipped to gradually regain strength

While the New Zealand dollar is likely to remain weak against the Australian in the short term, it should strengthen during the year, analysts say.

The kiwi dollar plunged to its lowest level in a decade yesterday, reaching A76.15c shortly before 7am.

By 8am the dollar had clawed its way back to A76.30c, only slightly lower than its level at market close the previous evening

BNZ currency strategist Mike Jones said market expectation for the Reserve Bank of New Zealand's monthly policy statement next week could cause the kiwi dollar to drop further against the Australian.

"But the bigger picture is one where we'll see a recovery in that cross rate over the next 6 to 8 months," he said.

"Unless you think the New Zealand economy is going to experience a double dip recession, there's no fundamental reason why it should hang around these low levels for too much longer," he said.

When further evidence of a sustained recovery in the New Zealand economy emerged, and when the Reserve Bank raised interest rates, the Kiwi dollar would gain ground against the Aussie, Jones said.

Sue Trinh, senior currency strategist at the Royal Bank of Canada (RBC), said there was an expectation that the Reserve Bank's looming policy statement would be "dovish" (that interest rates would not be raised), and this was the main cause of the kiwi's fall in value.

"I'm not a hundred per cent certain that we will get a dovish statement, if you look back in the December monetary statement the reasons that the RBNZ cited for limiting the need to hike rates before the middle of 2010 were higher exchange rates, increased lending margins by the domestic banks and a modest outlook for export commodity earnings.

"But since the end of January we've noticed that kiwi yields have actually fallen by about 80 basis points ... meanwhile the key bank lending margins have actually narrowed by about 50 basis points, so all those factors the RBNZ cited for not wanting to hike rates before the middle of the year have actually disappeared."

Trinh said that while the RBC did not expect an interest rate rise next week, the language in the statement may be less dovish than the market expected, and that would enable the kiwi dollar to gain some ground against the Aussie.

Jones said the BNZ's long-range forecast was for the kiwi dollar to move back above the 80c mark, against the Australian, sometime in the latter half of the year.

The "main drivers" influencing its outlook would be growth and commodity price differences between the two countries, he said.

"Prices for New Zealand exports like dairy are actually showing signs of topping out, so we actually expect differing commodity outlooks to have a drag on the kiwi-Aussie this year, but that won't upset the broader trend for a recovery in the kiwi."

He said the negative reaction to signs of a slowing Chinese economy, which influenced New Zealand and Australian commodity prices, was "overdone".

- ADDITIONAL REPORTING: NZPA