New Zealand's dollar is the most overstretched in three years, trading patterns suggest, putting in jeopardy its chances of surpassing a record high.

The kiwi, named for the flightless bird on the NZ$1 coin, has strengthened 7.4 percent versus the U.S. dollar this year, rising to within 0.1 cent of an all-time high. That's the best performance among 31 major peers tracked by Bloomberg. The gains pushed a measure of the currency's momentum to the highest level since July 2011, suggesting an imminent turnaround.

"The kiwi's probably at the top of the range," Mark McCormick, a macro strategist at Credit Agricole in New York, said by phone on July 9. "Our outlook for the second half of the year is that the U.S. dollar's probably going to make a comeback."

New Zealand's currency surged this year as the nation's central bank became the first in the Group of 10 to raise interest rates since 2011. At the same time, the Federal Reserve has reiterated its commitment to an accommodative monetary policy, with Chairwoman Janet Yellen saying last month that borrowing costs will stay at an all-time low for an extended period.


The kiwi rose to as high as 88.36 cents Thursday, approaching 88.43 in August 2011, which was its strongest level since being freely floated three decades ago. The median estimate of more than 40 strategists surveyed by Bloomberg foresees an almost 5 percent drop to 84 by year-end.

A Credit Suisse Group index based on swaps shows traders are betting the Reserve Bank of New Zealand will increase its 3.25 percent main rate by another 0.84 percentage point in the next 12 months. The Fed has kept its benchmark rate in a record- low zero to 0.25 percent range since 2008.

"We maintain a favorable view toward the New Zealand dollar," Eric Viloria, a strategist at Wells Fargo in New York, said by phone July 9. "The RBNZ is quite hawkish - they've been raising interest rates, they're in a tightening cycle - whereas with the Fed we're seeing a pretty steady course."

The kiwi received a further boost this week when Fitch Ratings revised New Zealand's credit outlook to positive from stable and affirmed its AA sovereign rating.

Even so, there are signs that the RBNZ's tightening may already be hurting the economy, which may in turn cap the local dollar's gains. Business confidence moderated last quarter to the least since the first three months of 2013, while home building approvals slid 4.6 percent in May, the most in four months. In the United States, the economic recovery is gathering pace with a report this month showing a pickup in employment.

Other technical signals for the kiwi such as the relative- strength index and Bollinger bands are also at or near levels suggesting a reversal in its world-beating advance.

"We're coming up on some major levels that should be a struggle for the kiwi," MacNeil Curry, a technical strategist at Bank of America in New York, said by phone on July 9. "Momentum is starting to wane and saying that this thing is getting a bit stretched."

NZ dollar holds above 88 US cents, may test record high this week

The New Zealand dollar held above 88 US cents and may test its post-float high this week as traders prepare for testimony from US Federal Reserve chair Janet Yellen and local data that's expected to confirm inflation is accelerating.

The kiwi traded at 88.03 USA cents at 8am in Wellington, little changed from the New York and Wellington closes on Friday last week. The trade-weighted index was at 81.90 from 81.89.

Second-quarter inflation figures due on Wednesday are expected to show the consumer price index sped to 0.4 percent last quarter for an annual pace of 1.8 percent, according to a Reuters survey. That would be a tad faster than the Reserve Bank forecast last month and keep intact expectations that governor Graeme Wheeler will raise interest rates again as soon as this month, lifting the official cash rate to 3.5 per cent.

Yellen is scheduled to deliver her semi-annual policy testimony to the Senate Banking Committee tomorrow and address the House Financial Services Committee the following day, after minutes of the June Fed meeting showed that policy makers are planning to end their monthly bond-buying programme after the October gathering.

"The price action tells you there's fairly decent demand" for the kiwi, said Sam Tuck, senior FX strategist at ANZ New Zealand. "It has been unable to break through the psychological level of 88.42, the post-float high. It's a sign we really need to make new ground. The catalyst may come from Q2 CPI or Yellen."

ANZ New Zealand's CPI forecasts match the market consensus, "which would be consistent with the RBNZ," Tuck said.

He sees the kiwi trading in a range of 87.90 US cents to 88.35 cents in the next 24 hours and a range of 87.60 cents to 89 cents in the week.

"It has been a gradual grind higher since the June MPS" for the kiwi, he said. "It is stubbornly bid."

The local currency traded at 64.73 euro cents, little changed from the New York close, and little changed at 51.41 British pence. The New Zealand dollar was almost unchanged at 93.85 Australian cents and traded at 89.24 yen. - BusinessDesk