Dollar expected to lose ground

Kiwi’s strong start to year will be undercut if greenback strengthens, analysts say

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The New Zealand dollar has started the year on a strong note, but economists and strategists expect it to lose ground once the all-important US dollar picks up later this year.

Since late December, the kiwi has been on a roll, rising by about 2 per cent against the greenback and approaching US72c, a three-month high.

The kiwi spent last year oscillating in a wide US68c to US76c range, buffeted by the New Zealand election and volatility in the US dollar.

ANZ senior economist Phil Borkin said in some ways the kiwi’s New Year strength reflected a typically thin trading period. Its short-term gains were “not inconsistent” with the rally in other “risk” assets, especially global equities.

The US dollar has also been struggling, despite reasonable economic data, the passage of President Donald Trump’s tax cuts and expectations the Federal Reserve will increase its funds rate twice this year.

But economists and strategists expect the kiwi’s greenback-inspired gains to be short-lived.

“We don’t anticipate a lot of strength because we expect the New Zealand economy to go into transition, so growth will not be as wonderful as it has been,” Borkin said.

Rate hikes from central banks around the world, and expectations liquidity would start to move back to more normal, pre-GFC levels in the second half of 2018, would bring greater volatility and downward pressure on the kiwi, he said.

Borkin expects the currency to head lower by the end of the year to around the high US60s.

Westpac senior markets strategist Imre Speizer expects to see some early short-term gains in the kiwi.

“In the near term, it goes higher, long-term, lower,” he said. “The US dollar is struggling here.”

Speizer expects the US dollar to stay on the back foot for the next few weeks, or possibly a month or two.

He said record-breaking runs on the US and other sharemarkets suggested the appetite for risk had revived. That, in turn, could have a dampening effect on the US dollar, which tended to gain when investors became risk-averse and sought safe havens.

Speizer expected the US dollar to reassert itself as the year goes on, putting downward pressure on the kiwi.

“Our view is that eventually, when the case for more Fed rate hikes becomes more compelling, then the US dollar will take more notice.”

To that end, Fed watchers will be focusing on US wage and inflation data to firm up the market’s view that the central bank will lift rates.

Speizer expects the kiwi to fall to US68c in the first half, and possibly lower still to the mid-US60s by the second. However, given the market’s current dynamic, he expects a run up to US75c over the next month or so.

ASB Bank chief economist Nick Tuffley takes a contrary view of the where the kiwi will be, based on his expectation that the US dollar will continue to weaken over the year.

He expects to see the kiwi at US75c by the year’s end, based mostly on his view that the US dollar will continue to struggle.

Tuffley said much of the market’s enthusiasm for Trump’s rise to power was driven by expectations of largescale pump priming of the US economy by the new Administration, which so far has failed to materialise.

“It [the US dollar] is struggling to gain ground, despite the tax cuts.”

The Bank of New Zealand expects kiwi to shift sideways throughout the year — not wandering too far beyond a US68c to US70c range.