Singapore based Fitch Solutions has revised up its outlook for the New Zealand dollar on the strength of the post-Covid recovery.
It now sees the kiwi average US73c this year and US75c in 2022 - from previous forecasts of US71c and US72c respectively.
The kiwi was trading at US72.6c yesterday, having slipped from recent highs above US73c immediately following last week's RBNZ forecasts for the official cash rate to rise in 2022.
The report by Fitch Solutions Country Risk and Industry Research said it expected to see "improving investment flows on the back of a continued recovery of the New Zealand economy" which would provide tailwinds for the kiwi dollar.
It is forecasting economic growth to pick up by 3.6 per cent in 2021 after a contraction of 1.2 per cent in 2020.
"The strength of the NZ dollar is closely linked to the country's investment outlook , which has brightened in recent months on the back of the country's effective virus containment and economic rebound," Fitch Solutions economists said in a new report.
"We expect this trend to persist as economic activities continue to normalise, and this will support investor optimism, boosting financial inflows and drive the NZD stronger."
A stronger kiwi dollar will help keep inflation pressure under control as it will limit the rise (in the local currency) cost of imported goods, including things like cars and petrol.
It will provide a head wind for exporters - like Fonterra - who sell in the international market in US dollars.
However Fitch Solutions said that while it expected dairy prices to soften slightly over the remainder of the year "the small degree of price softening is unlikely to cause a material worsening of New Zealand's terms of trade".
"We continue to expect a robust terms of trade to prop up the New Zealand dollar," it said.
This view was confirmed with new data from StatsNZ yesterday which showed New Zealand's goods terms of trade lifted 0.1 per cent (q/q) in the first three months of the year.
Export and import prices weakened with export prices falling 0.8 per cent, imports fell 0.9 per cent.
Last week in its May Monetary Policy Statement the Reserve Bank warned that inflation was building and published forecasts which implied the official cash rate wil begin to rise from the middle of next year.
Globally economists and financial market analysts have warned that the pandemic is constricting the supply of goods and labour, pushing up costs and raising concerns about inflation.
However experts are divided on whether this will prove a persistent phenomenon or a short term issue which eases as the economy returns to normal post-Covid.
On Monday Fitch Solutions also produced a report forecasting an improvement in consumer spending in New Zealand in 2021.
In that report it suggested inflation pressures will be temporary.
The report revised New Zealand expectations upwards our inflation forecast for New Zealand, with consumer price inflation in 2021 expected at the 2.2 per cent (yoy).
"However, we expect current inflationary pressures to be temporary and do not expect them to derail the consumer recovery outlook," the report said.
"Furthermore, although average wage growth slowed nominally in New Zealand across the height of the Covid-19 outbreak, latest data shows that average wages are continuing to trend upwards year on year."
Fitch Solutions is part of the Fitch Group which also includes Fitch Ratings, although it is a distinct business unit.