By Roger J Kerr

There are some early tentative signs that the Kiwi dollar surge upwards over the last six months may finally be running out of some steam. A marginal recovery in the USD globally and the failure of the Australian dollar to push-on higher to the mid-0.9000's against the USD have held the Kiwi back from further gains above 0.7500/0.7600.

Commodity price increase and global sharemarket gains have been two more important variables behind the dramatic appreciation of the NZD from 0.5000 to 0.7500 over the past six months as well.

However, over recent weeks these markets have not been able to add substantially to their earlier increases. The US company reporting season produced profit results generally better than expected, however the Dow Jones Index has struggled to hold above 10,000 as the quality of the profits were more from historical cost-cutting than genuine sales revenue growth.

It appears that these international drivers of the Kiwi dollar value may reduce in importance and intensity as the global forex markets start to wind-down ahead of the 31 December year-end.

Certainly, the long-NZD position holders are more likely to be sellers of NZD's to close-down/reduce positions than aggressive NZD buyers to add to their positions at this time of year.

The lead-indicators of copper prices and the Baltic Freight Index for shipping suggest that commodity prices (thus the AUD) are unlikely to push higher over coming months.

The upcoming RBNZ OCR review this week on 29 October and their full Monetary Policy Statement on 10 December stand to be more influential over the NZD/USD currency direction over coming weeks.

RBNZ Governor Alan Bollard has been attempting to talk the Kiwi dollar down for several months, but rather disturbingly contradicted himself last week in front of the Parliamentary Finance and Expenditure Select Committee by stating that the high NZD did not necessarily prevent him from increasing interest rates if it was needed in response to a strong housing market and retail spending.

An early increase in interest rates would cement the NZD value above 0.7000.

The near term outlook for the Kiwi may now well be more centred on what the RBNZ says and does.

The moneymarkets are pricing-in increases in the OCR from March 2010, rising rapidly to 4.50% from the current 2.5%. Bank economists and other economic forecasters are also staking claims that official interest rates have to increase much sooner in 2010 than the "late 2010" policy stance the RBNZ currently has.

The economist view is that the housing market is back on the rise, this stimulates strong consumer spending and inflation automatically increases. Inflation has not come from excessive consumer demand in New Zealand for many years and the higher currency is in fact causing imported consumer goods to fall in price.

The fears from these economists of inflation increasing in 2010 are misplaced. The significant rise in the Trade Weighted Index and NZD/USD exchange rate over the last six months have already tightened monetary policy from -1000 to +400 on the combined Monetary Conditions Index.

Why would the RBNZ need to increase interest rates to tighten monetary policy even further when the inflation and growth forecasts for 2010 are subdued, at best?

Mr Bollard has the opportunity to influence the NZD lower for the benefit of the wider economy by not bowing to the current money market and economist pressure.

There is no need to increase short-term interest rates at all for many months when the steep upward slope of the yield curve and the high NZD value already have monetary policy considerably tighter than three or six months ago. The New Zealand economy desperately needs an export-led recovery based on real income growth, the appreciation of the NZD this year has destroyed that opportunity.

The RBNZ require some steel in their backbone at this time to stick to their current monetary stance and not be swayed by the short-term, fickle and changeable views of the private sector economists.

The RBNZ were bullied into tightening monetary policy at the wrong time in late 2007 that caused the economic recession by the end of 2008. They have the power to rectify a major problem for the export sector with the over-valued currency and thus should not make another policy mistake by pushing interest rates up too soon.

The Canadian central bank is not raising their rates as they see problems for their export economy from an over-valued currency. The RBNZ here should follow their lead.

Annual inflation in Australia is forecast to increase to 3.5% in 2010 which contrasts starkly with New Zealand where inflation is forecast to remain between 1.0% and 2.0%. Our short-term interest rates are already 1.0% below those of Australia and could go up to 2.0% below as the Aussies tighten monetary policy much sooner than us in 2010.

The NZ/Australian interest rate differential points to the NZD/AUD cross-rate falling from 0.8200 to 0.7700 as foreign investors pull funds out of NZ in favour of Australia.

* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com