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17 Jan 2014

The New Zealand Dollar in 2014

After a strong finish to 2013, there is widespread speculation on the future of the New Zealand dollar over the next 12 months.  Unlike many other smaller currencies, the Kiwi kept up pace with the US dollar and British Pound last year, while rising over 13 percent against both the Australian dollar and Japanese Yen.  With a resurgent New Zealand economy and a falling Australian dollar, some commentators are even tipping cross-Tasman parity sometime in 2014.
A number of factors will influence the New Zealand dollar in 2014, including local economic growth, interest rates, and a range of global conditions.  Unlike previous years, there was almost complete divergence between the Kiwi and Aussie for parts of 2013, an unusual occurrence for currencies known to move in a lock step pattern.  While the growing strength of the Kiwi is welcomed by many, the novelty of recent conditions will make forecasts tricky in the coming months. 

Within Organisation for Economic Cooperation and Development (OECD) countries, only Mexico, Israel, and Chile are expected to post stronger growth than New Zealand in 2014.  According to HSBC economist Paul Bloxham, "We expect that the New Zealand dollar might even get to Aussie dollar parity for the first time in 40 years... That's a big deal for New Zealand of course, because it will put some pressure on the traded sectors of the economy."

The strength of the New Zealand economy is being attributed to low interest rates, high dairy prices, and the ongoing construction boom taking place in Christchurch.  Even now, almost three years after the Christchurch earthquake, large projects are coming through that are expected to drive gross domestic product (GDP) to 3.4 percent this year.  With low interest rates continuing to influence housing growth, most of the conditions which led to a strong economy in 2013 remain relevant for this year.  

However, New Zealand remains unusually buoyant in the face of international pressures, something that could change in 2014.  The future of the US Federal Reserve stimulus program will undoubtedly influence the Kiwi, and could lead to a decline in value sometime throughout the year.  There is also the danger that a strong NZ dollar could put the brakes on growth, with Central Bank Governor Wheeler recently saying the exchange rate is unsustainable at current levels.

While increased demand for dairy products in China is good news for Kiwi producers, further increases to the New Zealand dollar could adversely affect income coming into the country.  According to Tim Mackle from Dairy New Zealand in a statement to the ABC, "We're exporting over 95 per cent of the milk that we are producing, so on that basis it's always a big risk... But that just means we've got to focus very hard on being competitive and efficient and as productive as we can on the farm."     

Currency speculation is far from an exact science, with the fundamental and technical conditions influencing the market hard to define let alone predict.  However, the New Zealand dollar has the potential to continue its strong performance in 2014, especially if it can resist the effects of US Fed tapering.   Even if the NZ dollar struggles against the greenback, the expected RBNZ rate hike in March could fuel further gains for the local currency in other markets.