"Underlying this projection is a sense this is as good as it gets for the global economic cycle," BNZ currency strategist Jason Wong says.
Exporters would have taken advantage of the recent fall in the dollar to top up some hedging, a sensible move.
Topping up hedging on further weakness seemed appropriate. Importers should take cover on any moves back above US70c, he said.
In 2017, world growth was on track to record its best year since 2011 but economic momentum from now started to flatten.
Reflecting that dynamic, New Zealand’s terms of trade reached a record high in the September quarter and were now expected to fall. There were already clear signs New Zealand export commodity prices were in a "topping out" phase.
The BNZ was projecting about 5% of down side to the index of New Zealand commodity prices.
"Global forces, such as world growth momentum, commodity prices and risk appetite therefore represent a headwind for the New Zealand dollar through the coming year, reducing the probability of the kiwi moving higher next year."
The ASB commodities price index, released yesterday, fell in all denominations for the week ending December 8. The index fell 0.7% in both New Zealand and US dollar terms.
Weaker sheep/beef and dairy prices drove most of the fall.
Lamb, beef and wool prices all fell and butter led dairy prices lower. In contrast, both whole and skim milk powder posted gains of 1.8% and 3.4% respectively.
The dollar dipped 0.7% in the same week and had continued to trade near those levels this week.
Mr Wong said narrowing NZ-US interest rates, a feature of the past few years, were expected to continue as the new year began. As the year progressed, the trend was expected to be arrested.
The BNZ projected two rises in the official cash rate from the Reserve Bank in the second half of the year, albeit the risks were weighted towards a later than earlier start to the tightening cycle.
"Rate dynamics will eventually morph from a negative to a positive force for the New Zealand dollar but this is a story for later in 2018."
Respondents to an ASB Kiwi dollar barometer survey had significantly revised down their NZ-US dollar outlook.
The respondents expected the cross to average US65.9c by the fourth quarter next year, compared with a 12-month outlook of US75c three months ago.
ASB senior economist Mark Smith said given recent dollar volatility, it was little surprise to see an increase in hedging intentions. Eighty-four percent of respondents planned to hedge exposures, the highest level in the four-year history of the survey.
There were differences by trade orientation. The lower dollar reduced hedging intentions for exporters (52.4%) and increased intentions for importer/exporters rising to 97%, the highest on record.
For those enterprises planning to hedge, the cover was equivalent to 93.7% of foreign exchange exposures, also the highest on record, Mr Smith said.
More than 90% of respondents believed there had been an election impact and about 75% believed the election outcome had weighed on the dollar.
"We caution there are likely to be other factors also impacting on the dollar."
More than a third of respondents felt the next bout of foreign exchange volatility would be the result of US President Donald Trump and subsequent US trade policy and protectionist sentiment. Mr Trump was the most likely source of volatility for exporters and importers. For more than a third of importers/exporters, domestic politics was seen as likely to be the catalyst.
