Prediction kiwi will hit US90c

HAMISH RUTHERFORD
Last updated 05:00 02/08/2011

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Currencies

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Many currency experts see the New Zealand dollar going further in the short term, including hitting US90c in the coming weeks.

After breaking through US88 cents when the market opened yesterday, the kiwi then rose to US88.44c on news that a debt compromise had been reached in Washington.

The dollar was trading this morning at US87.70.

While the US government struck a deal to raise the amount of debt it can borrow - narrowly avoiding a  default on bond repayments later this month - the deal promised only a quarter of the US$4 trillion in budget savings credit rating agencies said were needed over the next decade to avoid a credit rating downgrade.

Imre Speizer, senior market strategist at Westpac, predicted the deal would lead to a short "relief rally" in traditionally high risk investments such as the New Zealand dollar when the New York market opens overnight.

Once that recedes, markets would start to focus on the ’’material’’ prospect that the US would lose its coveted AAA credit rating. This would only serve to further weaken the status of the US dollar as a safe haven, sending investors elsewhere.

"Kiwi goes up on the euphoria [of the debt deal], and it goes up again on a weak US dollar,’’ Speizer said. ‘’Kiwi goes up and up no matter what happens.’’

Kevin O'Sullivan, head of foreign exchange at OMFinancial said the US deal offered savings of "only" US$1 trillion, less than was necessary to lead to the US dollar improving.

"I honestly believe we are on the way to [US] 90 cents,’’ O'Sullivan said. "I can't see any good reason to sell New Zealand dollars, or more to the point, I can't see any good reason to buy US dollars."

Christ Tennant-Brown, an economist at ASB, said the value of the New Zealand dollar appeared "stretched’’ although he admitted that US90c "certainly looks possible" and the recent history of the dollar had been surprising.

"It keeps on exceeding what we think will be the top.’’

Economists now concede that the prospect of the Reserve Bank intervening to try to weaken the currency is now growing.

Tennant-Brown said in calm markets the dollar could continue to go higher, although if markets became volatile at the looming prospect of a US downgrade, markets may start to become highly volatile or even dysfunctional, which could give New Zealand's central bank a real prospect of having an impact.

"When markets are calm you could see the kiwi easing higher in the way it has been. It's hard to know how the markets would react to the kiwi and Aussie dollars at this level if markets got very, very volatile,’’ adding that this could be the trigger for Reserve Bank intervention.

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- BusinessDay.co.nz

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