Sliding dollar no magic bullet

The dollar's big move lower last week looks set to continue and will have exporters cheering, but the country's largest fund manager has warned the weaker kiwi will not be a magic bullet for the economy.

Whether due to a flurry of rumours on Japan's retail bond market, the string of weak recent local economic data or a resurgent greenback, last week was a momentous period for the kiwi. It closed Friday's local session at 66.26USc, up a little from the 17-month low of 65.60USc it hit on Wednesday that took its slide since early February to 4.6 per cent. Most commentators are predicting the kiwi will continue to move lower over coming months.

But AMP senior portfolio manager Grant Hassell said he was concerned the kiwi's fall would not be sufficient to put the lead back in the economy's pencil quickly.

"Capacity constraints are tough, and if the dollar falls, maybe we're not going to get the amount of stimulus we've historically seen," Hassell said at AMP's quarterly investment briefing. "Exporters can only experience a pricing influence. They get more for the products they're selling, but they can't actually turn the tap on and produce more products.

"The way you produce more product is you improve productivity, which takes a reasonable amount of time, or you hire more people, which is hard at the moment."

The dollar's fall came amid rumours Japanese banks and brokers had been asked to stop marketing uridashis and that big international hedge funds had begun short selling the kiwi, effectively betting it will continue to drop.

Japanese retail investors have been big buyers of uridashi bonds as they chase New Zealand's 7.25 per cent interest rate, the highest in the industrialised world. Uridashi bonds account for almost half of the total of $45 billion in offshore issuance outstanding, says the Reserve Bank.

BNZ currency strategist Sue Trinh said rumours had it that "some security houses are trawling the investor circuit telling punters the kiwi and aussie bond story is over".

She said: "It takes on even more importance given the rather large maturity schedule over the March month."

Next month, about $1.4 billion worth of uridashis and their European equivalents reach the end of their term. A widespread decision by investors not to reinvest in kiwi-denominated bonds would remove significant support for the kiwi on forex markets.

On top of that, issuance of uridashis and eurokiwis has slowed from a peak of about $3.5 billion in October last year to about $1.9 billion last month. Trinh expected "good levels" of issuance to continue, "but that will only serve to cushion the downside for the kiwi".

Currency strategist John Horner, of Deutsche Bank in Sydney, believed the uridashi and eurokiwi developments were a peripheral factor in the kiwi's recent move lower. Of far more importance was the the contraction in New Zealand's yield advantage over the US dollar. That narrowing had now reached a point where the down- trend in the kiwi was firmly in place.

Horner said New Zealand's consistently weaker recent economic data had brought forward expectations of when the Reserve Bank would begin cutting interest rates.

Horner believed a move by the kiwi to the low 60USc level now seemed likely over coming months.

Trinh also believed the kiwi would continue to go lower through to the end of the year, probably to 58USc or 59USc.