World-Beating Kiwi Seen Topping Out Near Record: Market Reversal

Jul 11, 2014 12:31 pm ET

July 11 (Bloomberg) -- New Zealand’s dollar is the most overstretched in three years, trading patterns suggest, putting in jeopardy its chances of surpassing a record high.

The kiwi, named for the flightless bird on the NZ$1 coin, has strengthened 7.3 percent versus the U.S. dollar this year, rising to within 0.1 cent of an all-time high. That’s the best performance among 31 major peers tracked by Bloomberg. The gains pushed a measure of the currency’s momentum to the highest level since July 2011, suggesting an imminent turnaround.

“The kiwi’s probably at the top of the range,” Mark McCormick, a macro strategist at Credit Agricole SA in New York, said by phone on July 9. “Our outlook for the second half of the year is that the U.S. dollar’s probably going to make a comeback.”

New Zealand’s currency surged this year as the nation’s central bank became the first in the Group of 10 to raise interest rates since 2011. At the same time, the Federal Reserve has reiterated its commitment to an accommodative monetary policy, with Chair Janet Yellen saying last month that borrowing costs will stay at an all-time low for an extended period.

The kiwi rose to as high as 88.36 U.S. cents yesterday, approaching 88.43 in August 2011, which was its strongest level since being freely floated three decades ago. It traded at 88.09 as of 12:30 p.m. in New York.

Stochastics Signal

The currency’s stochastics indicator, when measured on a monthly basis to smooth out daily peaks and troughs, has surpassed the March levels that preceded an almost 2 percent decline in the currency over the next two months. The median estimate of more than 40 strategists surveyed by Bloomberg foresees an almost 5 percent drop to 84 by year-end.

A Credit Suisse Group AG index based on swaps shows traders are betting the Reserve Bank of New Zealand will increase its 3.25 percent main rate by another 0.84 percentage point in the next 12 months. The Fed has kept its benchmark rate in a record- low zero to 0.25 percent range since 2008.

“We maintain a favorable view toward the New Zealand dollar,” Eric Viloria, a strategist at Wells Fargo & Co. in New York, said by phone July 9. “The RBNZ is quite hawkish -- they’ve been raising interest rates, they’re in a tightening cycle -- whereas with the Fed we’re seeing a pretty steady course.”

The kiwi received a further boost this week when Fitch Ratings revised New Zealand’s credit outlook to positive from stable and affirmed its AA sovereign rating.

Economies Diverge

Even so, there are signs that the RBNZ’s tightening may already be hurting the economy, which may in turn cap the local dollar’s gains. Business confidence moderated last quarter to the least since the first three months of 2013, while home building approvals slid 4.6 percent in May, the most in four months. In the U.S., the economic recovery is gathering pace with a report this month showing a pickup in employment.

Other technical signals for the kiwi such as the relative- strength index and Bollinger bands are also at or near levels suggesting a reversal in its world-beating advance.

“We’re coming up on some major levels that should be a struggle for the kiwi,” MacNeil Curry, a technical strategist at Bank of America Corp. in New York, said by phone on July 9. “Momentum is starting to wane and saying that this thing is getting a bit stretched.”