The New Zealand dollar closed in on the significant barrier of A90c yesterday and any relief for exporters to Australia looks unlikely in the near term.
The New Zealand dollar had surged 12% against the Australian dollar this year as the rebuilding of Christchurch, rising house prices and high dairy prices underpinned confidence and spending, bolstering the local economy and signalling higher interest rates.
In contrast, Australia's economy was slowing as the mining boom came off the boil, meaning rates were headed lower.
Adding to the mix is the likelihood Reserve Bank of Australia governor Glenn Stevens is considering cutting official interest rates to 2.5% at the same time as Reserve Bank of New Zealand governor Graeme Wheeler is considering lifting rates to 2.75%.
That would make the kiwi a more attractive yield investment for overseas investors as they look for higher returns.
The New Zealand central bank is probably the only one in the OECD thinking about a hike in interest rates, meaning the kiwi will outperform.
BNZ currency strategist Mike Jones said his short-term ''fair value'' for the NZ dollar-Australian dollar swap was driven off the three-year swap rate, relative business confidence and commodity price differentials.
The model suggested the current combination was equivalent to a short-term fair value of A83c to A86c for the kiwi - about A2.5c higher than a month ago.
Asked what would trigger a correction for the New Zealand dollar back towards fair value, Mr Jones said it was usually presaged by a turn towards lower fair value.
''It's not necessarily enough for the spot [price] to simply trade above fair value; we need this to occur in combination with a weakening in the fundamentals to be more confident that the uptrend is topping out.
''Do we think we are in this of environment? No. If anything, we'd expect fair value to move higher from here, not lower.''
As seen this week, New Zealand business confidence continued at high levels compared with Australia.
New Zealand commodity prices were expected to hold at levels only 5% or so below all-time highs, even as Australian export prices continued to feel the impact of China's slowdown, he said.
For interest rates, the market had already moved a long way with New Zealand-Australia swap rates widening 1% in three months.
The revised Reserve Bank of Australia view from National Australia Bank economists suggested deeper rate cuts were expected, over and above what the market was now pricing.
''In short, the New Zealand dollar looks expensive on a fair value basis, but a correction looks unlikely,'' Mr Jones said.
The ASB Price Index fell 0.9% last week in New Zealand terms, although US dollar commodity prices rose 1.1% for the week. ASB economist Daniel Smith said a strong kiwi reduced local currency returns.
Meat prices continued their post-drought recovery last week. Prices for both beef and lamb rose, although the increase in lamb prices was more pronounced at 1.1%.
