The Super Weak New Zealand Dollar
After the 2001 lows, the New Zealand dollar had several years of bull market, as it rose in 2007 to highs above 80 U.S. cents, above 60 Euro cents and nearly 100 yen. The collapse against the yen since then is particularly dramatic, losing more than half of its value in the latest 19 months. Although it took some beating in the year after that, most of the decline has come since the global financial turmoil became more dramatic in September 2008, with the New Zealand dollar dropping 45% in just 5 months against the yen.
The reason why the New Zealand dollar has taken such a beating against other currencies in general and the yen in particular is of course that New Zealand went into the slump with higher interest rates than others, meaning that its interest rates had more room to fall, putting downward pressure on the currency. The New Zealand dollar has in other words depreciated in value because of the same mechanism that has caused the yen to rally .
Where will it go from here then? At this point, it clearly looks undervalued, but as long as the global slump continues it will nevertheless be difficult for it to recover as people will expect the Reserve bank of New Zealand to cut interest rates further to counteract the slump.
Because New Zealand more or less appears to have structurally higher interest rates, that however means that once there is an economic recovery, it will probably again rally significantly, just like it did between 2001 and 2007.