The New Zealand dollar ($NZ) has risen sharply over the last year, up approximately 15% versus the United States dollar ($US).
This strength has been driven by a number of factors including: very strong commodity prices, a weak US economy, relatively high interest rates and buying from central banks looking to diversify their investments. The $NZ will likely receive further support from interest rate increases signaled by the Reserve Bank of NZ for late 2011, early 2012.
The main negative for the $NZ is our reliance upon overseas funding which continues to increase given the negative savings rate of New Zealand consumers and increasing government deficits. If foreign investors decide to reduce their investment in New Zealand the $NZ could fall sharply. This has been the pattern of the $NZ historically with steady rises often followed by sharp falls when overseas investors look to reduce risk.
However, for now we believe that the positives for the New Zealand economy and the $NZ are likely to outweigh the negatives and our currency is likely to remain at relatively high levels.