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05 Apr 2013

Why the Kiwi Dollar is so High

The New Zealand dollar hit a 20-month high against the US dollar recently, as well as reaching a five-year high against the yen. The kiwi has already had five consecutive weeks of gains against the world's biggest currencies, and most forecasts for the future are positive. There are a number of issues affecting this strong outlook, including increasing optimism in China and the Bank of Japan's recent announcement to end deflation and weaken its currency.

There is a lot of confidence surrounding the kiwi at the moment, with relatively high yields for investors and positive returns on the back of improving economic data. With both domestic and international issues strengthening the NZ dollar, the forecast is good on a number of fronts. Conditions in Asia are of increasing importance to the kiwi, with China now New Zealand's largest business partner and the Bank of Japan continuing its aggressive asset purchase program.

Both the Australian and New Zealand dollars are set for more advances in the weeks ahead, at least according to Australian Treasurer Wayne Swan. Most of the optimism depends on the latest GDP results from China, with an 8 percent expansion expected over the last quarter. If this plays out, it will be the highest level since the first quarter of 2012, with improved consumer spending and great fiscal expenditures likely to help maintain China's recovery past a single quarter.

An announcement was also recently made regarding the strengthening relationship between the Australian dollar and the yuan, with direct trading between the two currencies starting for the first time on April 10. With the kiwi closely tied to the aussie, this will directly influence New Zealand in the months ahead. Swan recently said that a team of Australian and Chinese academics will undertake a research project on the internationalisation of the yuan, something that will also have huge implications in the future.

The situation in Japan is also have a big impact on the New Zealand dollar, with Bank of Japan governor Haruhiko Kuroda recently announcing plans to double monthly bond purchases to about YEN7.5 trillion ($NZ92.42 billion) yen in an effort to end deflation and achieve 2 percent annual inflation in two years through weakening the yen. "With the BOJ's game changer we can expect more strength in the kiwi against the yen," said Mike Jones, strategist at Bank of New Zealand.

At the upcoming G20 summit in Washington, Japanese Vice Finance Minister Mitsuhiro Furusawa has said he will “explain that we are doing the utmost to beat deflation and that if it helps the Japanese economy recover, which would contribute to Asia and the world economy”. While the currency market is almost impossible to pin down accurately, the situation in Asia and further deterioration in US dollar sentiment are leading to strong forecasts for the New Zealand dollar over the months ahead.