Overseas traders say kiwi dollar ready to fly

Overseas currency traders are tipping the New Zealand and Australian dollars to surge by more than 10 per cent in the next few months, buoyed by a rise in commodity spending as central banks print unprecedented amounts of cash to rescue their economies.

That is despite a local market view that the kiwi's rise is not sustainable.

The New Zealand dollar leaped as much as 11 per cent this month in its best rally since at least 1975 on a trade-weighted basis. It reached a 2-month high of US58.02c on Thursday and ended last week at US57.06c. It closed yesterday at US56.46c.

BNP Paribas and Barclays Capital say the aussie, kiwi and Norway's krone will rise as much as 13 per cent by September.

Credit Suisse Group AG raised its three-month forecast for the aussie last week to US75c from US60c and its kiwi estimate to US59c from US46c.

Matthew Cobon, head of currencies in London at Aberdeen Asset Management, said he bought the aussie against the US currency because of the Federal Reserve's quantitative easing. "In the short term we still think this is a fairly negative event for the US dollar," said Cobon, whose firm manages about US$158 billion.

Aberdeen Asset Management, Hermes Pension Management and Kokusai Global Sovereign Open Fund all say the new money will spur demand for everything from iron ore and oil to wool, so they are buying aussies, kiwis and kroner.

"With the announcement of more and more printing of money, ultimately, consumers and banks will realise they want to get the cash out of their pockets," said John Brynjolfsson, chief investment officer of Armored Wolf in Irvine, California.

"The goal is to halt deflation. We've got to shift into real assets."

Options to buy the Australian dollar in the next month cost as much as 0.5975 percentage point more than contracts to sell on March 24, the most since October 2003, according to data compiled by Bloomberg.

The so-called risk reversal rate also favoured New Zealand dollar purchases the following day, reaching a six-year high of 0.35.

The shift has followed the Fed's March 18 announcement that it would buy as much as US$300 billion in Treasuries, joining Britain and Japan in so-called quantitative easing, after failing to spur growth by dropping benchmark interest rates almost to zero.

Currencies in commodity-dependent nations are already benefiting from the expected flood of cash as raw material prices rise. The Reuters/Jefferies CRB Index of 19 commodities has gained 5.1 per cent this month, the biggest rally since June. Oil last week topped US$54 a barrel for the first time in almost five months. It slipped yesterday.

But local currency watchers are not convinced the kiwi's rise is sustainable.

"It's a nice story," said Bank of New Zealand economist Craig Ebert, "but we'll believe it when we see it."

BNZ has one of the more upbeat views on the local dollar and while Ebert believed the kiwi would creep higher during the second half of the year, in the near term he expected it to fall from current levels.

"We think what's happening in the market now is overdone even with what's happened to the US dollar.

"A lot of this has just hinged on this printing of money fear which we think is going to be misplaced in the near term ... central banks are throwing so much money at the system [because] they're actually scared of deflation and are trying to avert a depression.

"I don't think any of this is going to cause a growth surge or inflation any time soon."

ANZ National Bank is even more bearish on the kiwi and remains convinced it will hit US49c by the end of June and US45c by the end of the year.

"Given New Zealand's external position, there is an inevitability about where the [kiwi] needs to head," ANZ economists said in their weekly Market Focus yesterday.

"The spirit of weakness remains intact."

Inflows into kiwi and aussies the day of the Fed announcement and the previous four were reported as higher than in 80 per cent of all five-day periods since 1997.

- BLOOMBERG