As the dollar surged to new highs yesterday, global investment banking giant Goldman Sachs warned its clients to sell the currency because New Zealand's economy is likely to "slow very quickly" next year.
The Wall Street bank's top currency trading tip for next year is to sell the New Zealand
dollar - which it says is 20 per cent overvalued - and buy the Brazilian real.
In a report to its clients - which include billion-dollar investment funds - Goldman Sachs is picking New Zealand interest rates will start falling next year.
When that happens foreign investor support for the kiwi "could rapidly disappear".
The report will be welcomed by Reserve Bank Governor Alan Bollard and Finance Minister Michael Cullen, who have tried and failed to sell the same story to investors.
Ironically, it comes as investors are once again piling into the New Zealand currency in expectation of Dr Bollard's lifting the official cash rate to 7.25 per cent tomorrow.
The aim of the rate rise is to slow the housing market and keep inflation below 3 per cent.
But with the New Zealand interest rate already one of the highest in the developed world, every additional rise attracts foreign investors, who push up the value of the currency.
That erodes profits for New Zealand exporters, who have to convert their foreign exchange earnings back into overvalued kiwi dollars.
As export earnings drop, the chances rise that the economy will face a "hard landing" later next year.
New Zealand's current account deficit is already one of the worst in the developed world. It was nearly $12 billion in the year to June.
In another worrying sign, world prices for key exports such as dairy and beef have started to fall, new data showed this week.
But despite the negative news the kiwi surged to a new high against the Aussie dollar yesterday. It was also trading close to 72USc - a level many exporters believe is unsustainable.
"A massive current account deficit, a housing market bubble and tight monetary policy suggest that the economy could slow very quickly," the Goldman Sachs report said.
It is picking that the kiwi dollar will be worth just 63USc in 12 months.
Local economists also predict a big fall. Latest ANZ bank forecasts pick it to fall to 59USc by June next year.
Picking the timing of the fall remains a challenge, the report said.
For that reason it advises clients to sell some New Zealand dollars now and buy Brazilian currency.
Brazil has high interest rates but a smaller per capita current account surplus.
* Yesterday a New Zealand Institute report said the high dollar and falling commodity prices were not solely to blame for New Zealand's export woes.
It said serious structural issues, such as the country's lack of integration with the global economy and its reliance on primary produce, were holding back export growth.
The dollar
* Hit new high yesterday against the Australian dollar of 95.83Ac and nudged 72USc
Interest rates
* Expected to follow the Official Cash Rate up by 0.25 per cent
The sharemarket
* Tumbled yesterday. Has dropped 2 per cent this week on fears of hard economic landing.
As the dollar surged to new highs yesterday, global investment banking giant Goldman Sachs warned its clients to sell the currency because New Zealand's economy is likely to "slow very quickly" next year.
The Wall Street bank's top currency trading tip for next year is to sell the New Zealand
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