Why NZ dollar could surprise

New Zealand’s economy is doing better than many people think, and the dollar is set to benefit from that with a surprisingly strong run, a fund manager says.

Thursday, April 19th 2012, 6:44AM

by Niko Kloeten

Currency is a particularly important topic for New Zealand investors, fund managers and advisers due to the high volatility of our dollar, the movements of which can often dwarf actual investment returns.

And according to Tower head of fixed interest Craig Alexander, the market has got it wrong by expecting the Kiwi to fall from its current level of about US82c.

He said Tower expects the dollar to continue to trade in the US80-90c range, while the consensus expectation is that the dollar will trade between US65c and US80c.

“By clear observation you would say we are at the top of the range,” he said. “The reason we disagree is that we think there has been a structural change in the constituents that make up the value of the Kiwi dollar.”

The first factor, he said, is the country’s terms of trade – the ratio of export prices to import prices, which he said was likely to remain strong due to high prices for the commodities New Zealand exports.

“The driver of terms of trade has been the commodity boom – there’s a total linkage between commodities, the terms of trade and the New Zealand dollar.”

The other major factors driving the New Zealand dollar against the US were the “competitive devaluation” of the Greenback, as well as the “increasing divergence” in monetary policy between the two countries.

“Here in New Zealand when you look at the potential track of the Reserve Bank and what they do to the OCR, the market is not expecting a hike until April 2013 but we think the market is wrong – we expect it will come at the end of the year.”

Alexander cited improving business confidence and rising house prices, particularly in Auckland, as reasons the OCR would be hiked earlier than expected.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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