Dollar pushes higher despite Covid shadow

The New Zealand dollar continues to leap ahead, pushing past two-year highs despite Covid-19’s long shadow over the economy. The currency traded yesterday at US69.86c, revisiting levels not seen since June 2018, a far cry from the lows of around US57c in March, when the world was still reeling from the impact of the pandemic.

Analysts said several factors were driving the kiwi up, but that the most compelling one was the country’s strong terms of trade performance.

Another was the market repositioning itself away from the likelihood of the Reserve Bank’s official cash rate (OCR) going negative.

New Zealand’s terms of trade — a measure of the purchasing power of the country’s exports — rose by 2.5 per cent in the June quarter, driven by stronger forestry and dairy product prices.

A “live” index created by Citibank shows the terms of trade trend has remained in place most of the year.

Hamish Pepper, fixed income and currency strategist at Harbour Asset Management and former Reserve Bank analyst, said the Kiwi was reflecting that strong terms of trade story.

“The story [it is telling] is that we are close to all-time highs for the terms of trade. It is saying that our export prices are doing well and we are not having to pay as much for things that we need,” Pepper said.

Much of the advance in the kiwi has come on the back of reduced expectations for the Reserve Bank to cut interest rates into negative territory in early 2021, because of the economy’s ongoing resilience in the face of Covid-19 headwinds.

News of Covid-19 vaccines means the global economy should take a recovery path next year, analysts said.

Higher global growth usually translates into high commodities prices, which typically means a higher New Zealand dollar. “They would obviously like it weaker, but [they realise] why it is where it is,” Pepper said.

Another key driver is that despite all the Covid-19 uncertainty, the strength of world sharemarkets meant that investors were comfortable holding kiwi dollars — typically viewed as being higher risk.

BNZ currency strategist Jason Wong said the advent of Covid-19 vaccines was going to be positive for world growth next year. He said if the US dollar continues to fall, as many expect, the kiwi should pass US70c.