The New Zealand dollar is expected to trend lower against the United States dollar to "trough" at $US50c early next year, but there remains some risk a bleaker than expected global recession could push it down to an eight-year low of about $US40c.
Any benefits for New Zealand exporters could be pared down, depending on the extent of the global recession and effect that has on the demand for goods.
Key to both New Zealand's recovery from recession and the extreme direction of the kiwi will be the depth, breadth and effect of the global recession and whether China reaches the critical less-than 8% quarterly growth, signalling recession there, BNZ currency strategist Danica Hampton said.
During recent weeks, in line with unprecedented volatility across all asset classes, the kiwi swung wildly, losing about 13% against the greenback, trading at $US67.33 in early October down to $US54.77 towards the end of the month - the lowest in five and a-half years.
Ms Hampton said in short-term trading in coming weeks, the kiwi was expected to remain "choppy" at about the $US59c to $US61c mark, then, in coming months, to decline in value to "retest" the $US53c October-low.
"We are expecting it to trough-out at $US50c by the first quarter of next year," Ms Hampton said.
There has been market speculation the kiwi could continue to decline towards $US40c - last reached in October 2000 when it hit US39c- and while there was "some risk", it was less than 50-50, she said.
A New Zealand recovery towards the end of 2009 depended on the state of the world economy, she said.
ABN Amro Craigs broker Peter McIntye said the kiwi historically followed commodity prices, which were retracking at present, and investors remained "risk averse" to countries with high current account deficits, such as New Zealand.
"While there is recession in the US, the other variable is investors' `flight to safety', away from currencies such as the kiwi," he said.
Ms Hampton said New Zealand's forecast growth in 2009 was low and would be the most difficult and "lacklustre" period , but with a lower kiwi, lower interest rates and Government fiscal spending, the economy would begin to improve towards the end of the year, Ms Hampton said.
While a forecast 3.8% growth in New Zealand for 2010 was optimistic, it also depended on the extent of recession experienced in the US, Eurozone and China, she said.
Ms Hampton said a "double-edged sword" was hanging over New Zealand importers and exporters with the scenario of a weakening kiwi.
Importers would have to pay more to import goods, but because of the recession, would find it difficult to pass on those costs to consumers.
Exporters, on the other hand, hard-pressed by an over-valued dollar during the past two years, would make gains in their profit margins.
"[However], this will only be a cushion.
"Exporters will be selling into a global market in recession and likely a falling demand for their goods," Ms Hampton said.
During recent weeks, the carry trade - foreign investors from countries with low interest rates attracted to New Zealand's high interest rates - had been repatriating billions in investment funds.
Ms Hampton said the carry trade "phenomenon" began in 2007 and was again prevalent this August.
However, market volatility worldwide during the past month prompted the carry trade investors to exit the high yield, higher-risk currencies such as the kiwi.
Against the Australian dollar, the country's largest trading partner, the kiwi rose to an "irrational" $A91c recently, Ms Hampton said.
This was expected to ease back to $A84-$A85c, but not to return to the $A80c lows of earlier this year.
