The New Zealand dollar has been on a roll. It rose by 15% against its US counterpart between September 2013 and hit $0.88 last month, the highest level since it became a freely floating currency in the mid-1980s.
Underlying the surge is the strength of New Zealand’s economy, which “has ridden a wave of dairy exports, selling milk and butter to Asia’s increasingly protein-hungry consumers”, says Josh Noble in the FT.
Buttressed by a frothy housing market, GDP growth reached almost 3% last year, prompting the central bank to raise interest rates for the first time in four years.
But the backdrop is changing. Global milk output has risen sharply and Chinese demand has slowed – its inventories of whole milk powder and whey are high, as Andrew Critchlow points out in The Daily Telegraph. So milk prices have ebbed, while falling house sales imply scant need for further rate rises.
Meanwhile, the improving US economy implies higher rates there, making the greenback more appealing.
What’s more, the New Zealand central bank has said that the level of the Kiwi is “unjustified and unsustainable”, another sign that the rally is unlikely to keep going. Morgan Stanley reckons that the currency will have fallen by 7% to US$0.79 by July 2015.