What’s next for the New Zealand dollar?

With America in the extraordinary position of needing to lift its debt ceiling – borrowing more to ensure it doesn’t run out of cash – to appease the credit ratings agencies, the greenback should be in free-fall.

Instead, it has climbed off its lows of two months back and New Zealand exporters now need to look closer to home for signals on where the kiwi is heading.

On a trade-weighted basis, the greenback hit a three-year low in early May but since then it has gained more than 3 percent.

The euro is buying around $1.40 – well below its peak this month of $1.60. Whatever worst-case scenario has been built into the greenback appears to have reached its nadir for now.

In last month’s Monetary Policy Statement (MPS), Reserve Bank Governor Alan Bollard said the greenback had recovered “as volatility in commodity markets and renewed focus on peripheral Europe have supported safe-haven currencies and seen the euro weaken considerably."

The Swiss franc has been a major beneficiary of safe-haven buying, reaching records against the euro, dollar and pound as the euro-region debates paths out of its debt crisis.

What does this mean for Kiwi exporters?

But that’s only half the equation for New Zealand exporters. Early May was also when the kiwi dollar sank to a two-decade low against the Australian dollar.

Now it is back to a 12-month high and, never mind the global economy, there are local reasons why the currency should outperform.

Exporters have to get their heads around the idea that the exchange rate is made up of two values – not just strength in the New Zealand dollar but also “the rictus of the U.S. dollar,” says Derek Rankin, of Rankin Treasury Advisory.

He has a target for the New Zealand dollar of 86.25 U.S. cents and his message to exporters is: “get hedged.”

Rankin has tracked the kiwi for 20 years and in that time the annual gap between highs and lows of the currency, expressed as a percentage, has averaged 17.5 percent. He used that figure to work backwards from the assumed low for the kiwi this year, 71.10 U.S. cents on March 17, to work out his forecast.

The kiwi sank against a backdrop of earthquakes in Christchurch and northern Japan, rising tensions from the Arab Spring and spiraling oil prices.
“The problem is exporters do not have enough cover and with an uptrend like this they wish they had more,” he said.

ExportNZ's national exporter outlook survey showed that 47 percent of respondents identified exchange rate volatility as a "key obstacle" to exporting or exporting more.

Rankin concurs with Bollard that there are structural changes occurring in the global economy that will underpin demand for New Zealand’s commodities.

But they disagree on the direction of the New Zealand dollar.

Last month’s MPS projected the trade-weighted index of the kiwi would ease back to 66 by 2014 from the prevailing level of 69.99 on June 8.

Since then the TWI has climbed above 73, the highest since February 2008, suggesting it would have to drop about 10 percent by 2014 to reach the Reserve Bank’s target.

“As the New Zealand dollar gets higher and higher, people have to understand this is along-term trend, he says.

The New Zealand dollar rose above 85 U.S. cents last week, a post-float high, on economic growth numbers that were twice the expected pace.