By Jonathan Underhill

The New Zealand dollar may rise to 90 US cents next year as the greenback is held back by a ballooning US current account deficit and low interest rates, according to economists at Australia & New Zealand Banking Group.

That would break through the highs of July-to-August last year to a new record since the kiwi dollar was allowed to trade freely in 1985.

The nation’s relatively high interest rates – the official cash rate of 2.5 percent looks fat compared to about zero offered by the US Federal Reserve – are part of the appeal. Ten-year government bonds yield more than 4 percent while the comparable Treasury note yields around 2 percent.

“Our central case has the NZDUSD going to 0.90 cents,” economists led by Cameron Bagrie said in their quarterly assessment of the New Zealand economy.

“This is premised on the structural challenges the US economy faces,” they say. “Not only does the US run a large current account deficit, but its interest rates are low, putting it in the ‘wrong’ part of the spectrum.”

“In short, it is difficult to mount an argument as to why investors should buy into a low-yielding debtor currency,” they said. While the US economy would recover, it may be via a widening current account gap.

“Emerging Asian currencies will do far better out of a US recovery than the USD itself, ironically, because they export so much to the US,” they said.

The only currency the kiwi dollar isn’t likely to outrun is Australia’s, a currency backed by higher interest rates and more liquidity, the economists said.

“Australia is viewed by global investors as a larger, more liquid, and more dynamic market to invest in – and they have been rewarded handsomely,” they said.

ANZ’s fair value for the New Zealand dollar is now 70 US cents and against the Australian dollar has fallen to 80 cents. The kiwi recently traded at 83.35 US cents and 78.13 Australian cents.

The nation’s biggest lender, ANZ said the economy may grow 1.9 percent in 2012, accelerating to 3.2 percent in 2013.

Among ANZ’s key assumptions are:

• The value of earthquake reconstruction work is equivalent to 0.75 percent of GDP per annum over the next five to seven years.
• Commodity export prices decline in the coming year but remain at historically high levels.
• Dubai oil prices trade within a US$95-to-US$105 per barrel range over the forecast period.
• The net outflow of migrants begins to reverse over the next few years.

ANZ says a neutral level for the OCR would be 4 percent to 4.5 percent.

Unemployment would remain at around 6.3 percent through this year, gradually easing over the next three years.

(BusinessDesk)