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AMP Capital New Zealand, which manages more than $18 billion of assets, is betting the kiwi dollar will fall as economic growth passes its peak and the nation's interest rate premium narrows as other central banks wind down their stimulus programmes.
The New Zealand dollar dropped more than 1 US cent yesterday as traders mulled a possible pause in the Reserve Bank's tightening cycle after milder-than-expected inflation figures coincided with a sharp drop in dairy prices. AMP Capital, which is overweight cash in its portfolio and underweight the New Zealand dollar, says current levels near a post-float high aren't sustainable. The kiwi fell to a three-week low 86.86 US cents today, recently trading at 86.92 cents, and the trade-weighted index was recently at 80.96.
"We have got an increasingly unjustified strong currency, especially after the most recent decline in commodity prices," chief economist Bevan Graham told a briefing in Wellington. "The currency is so high, fundamentals have turned against it, it's just a mater of time before we see some downside, so happy to be patient with that position."
The strength of the currency has been a head-ache for the Reserve Bank which embarked on a cycle of raising interest rates this year in a bid to head off future inflation as the economy grows faster than its potential output, a measure of growth rates possible without creating excessive inflation. The kiwi dollar has been bolstered by New Zealand's relatively high interest rates in a world where major central banks are running near-zero policies.
AMP's Graham expects central bank governor Graeme Wheeler will hike the official cash rate a quarter-point at next week's review to 3.5 percent, and will raise the key rate again in December, depending on the strength of the currency.
"The Reserve Bank will want to bank a bit more before they pause. The reality is the economy is actually still growing strongly," Graham said. "The only question at the moment is exactly how long that pause is going to be."
Guy Elliffe, AMP Capital's head of equities, said the currency's continued strength has been a "big surprise" and that the market is expecting it to turn around.
"If you really believed the New Zealand dollar was going to be sustained at these current levels, a number of listed companies would be having a little bit of a valuation correction," Elliffe said. "Because stock prices aren't falling as the currency's rising the market is seeing some sort of reversion, and if that reversion doesn't occur, I think there's going to be a bit of a challenge for some of the stocks of the exporting sector."