Strong Kiwi dollar – what’s driving the recent surge?

The New Zealand dollar has rebounded strongly in the last couple of months.

It’s been sitting comfortably above US$0.63 in recent days, up eight per cent from under US$0.59 in late July.

That’s the highest in more than a year and not far from the long-term average of US$0.66.

There are a few reasons for this recent surge, and they’re not all about us.

The first rate cut in more than four years from the Federal Reserve was a factor, especially because it was bigger than some expected.

We’ve seen rate cuts in Europe, the UK and obviously here in New Zealand too.

But that first move from the Fed was bigger and bolder, making for a wider interest rate differential between us and them.

The US dollar index is down more than five per cent in the past three months, which means the greenback has weakened against most currencies, not just us.

The New Zealand dollar is a cyclical currency, which means it tends to follow the economic cycle, rising when sentiment is upbeat and falling during times of uncertainty.

The Fed’s desire to act quickly has also, in the eyes of investors, reduced the chance of a recession in the world’s biggest economy.

That improving optimism has also pushed us higher.

Last but not least, the New Zealand dollar tends to follow dairy prices and the fortunes of the agricultural sector.

That’s unsurprising, as the overall economy is highly dependent on our biggest commodity export.

Global dairy prices are up more than 12 per cent so far in 2024, with prices having rebounded to near two-year highs.

That strength allowed Fonterra to increase its milk price forecast for the 2024/25 season again last month.

The $0.50 increase has lifted the midpoint $9.00, which would make this season’s payout second only to the $9.30 we saw in 2021/22.

Rising business confidence and economic stimulus measures in China have also helped propel the New Zealand dollar higher.

Whether a stronger currency is good or not depends on your perspective.

Our export sector would probably prefer it was lower, as that increases its competitiveness on the global stage.

However, the recent strength might lend a hand to the Reserve Bank in its ongoing battle against inflation.

Imported (or tradables) inflation represents about 40 per cent of the inflation basket, with categories like food, clothing, furniture and transport particularly sensitive to currency movements.

Because of this, a stronger currency should ensure we see a steady decline in interest rates.

Demand for the New Zealand dollar typically decreases when it’s offering a lower yield, which in turn should act as a handbrake on further currency strength.

At current levels the currency is still trading at about four per cent below its long-term average against the greenback.

However, it’s worth noting that while our US dollar exchange rate gets all the attention, it’s the odd one out in many ways.

Against the Australian dollar, British pound, euro and Japanese yen, the NZ dollar is stronger than it’s historically been.

The Reserve Bank’s trade weighted index (TWI) applies weights to the currencies of our major trading partners, based on how much business we do with them.

The TWI is seven per cent above its long-term average, despite us being below historical levels against the US dollar (and the Chinese Renminbi).

Currencies are notoriously difficult to forecast over short timeframes.

However, the next moves from the world’s respective central banks might determine where they head in the immediate future.

It’s all relative, so with policy rates headed lower in most places it could come down to who moves the fastest.

Looking ahead to 2025, the fortunes of the NZ dollar could also be closely linked to global economic conditions.

If the positive tone continues, we might continue to push higher.

If a bout of uncertainty or renewed risk aversion hits, we could find ourselves back in the 50s before you know it.

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