Currency fundamentals 'still strong'

Investors should not be too spooked by reports that some analysts think the dollar is overvalued, economists say.

Tuesday, February 18th 2014, 10:23AM

by Susan Edmunds

Two analysts from SLJ Macro Partners in Britain wrote in a note to clients that while the case for the kiwi seems compelling, the reality is quite different.

"New Zealand has severe structural weaknesses that are very similar to those of crisis-hit southern European and southern emerging-market economies. Kiwi may be 20 per cent overvalued," they wrote.

They said they were not convinced about the good news stories being painted of the dollar. "The economy has high growth, high terms of trade, and the currency is high-yielding. However, the case for kiwi is, in our view, much less persuasive."

NZIER economist Shamubeel Eaqub said there was a bit of scaremongering going on. He said he still felt the New Zealand dollar was well supported in the short term, with rising interest rates, good commodity prices and economic growth.

But he said that did not mean that it was without risk. He identified three major threats: The overheated Auckland property market, where he said prices were at extreme bubble proportions. Eaqub said as interest rates went up, there was a risk the bubble could pop and spill over to the rest of the economy.

The impact of rising interest rates in general was another risk, he said. NZIER is forecasting 3% growth this year but a third of that is expected to come from the Christchurch rebuild. “The underlying growth is slow and not the kind of growth that would raise rates normally.”

And there were risks from the global economy, he said. Australia seemed to be picking up again after its rates cuts but New Zealand was still very exposed to any change in the fortunes of emerging economies, he said.

“In general, the fundamentals are positive for the New Zealand dollar but that’s not to say there are no risks.”

ASB economist Chris Tennant-Brown said while the kiwi was close to a post-float high against the US dollar it was supported by the strong economy and looming interest rate rises.

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