The Kiwi dollar dropped to a significant 2.5 year low last week against the greenback, sinking to 64.26 US cents on the back of rising US interest rates and weak domestic data. While the dollar has seen a spirited rise since then, coming back to its mid-September levels, many experts are forecasting the Kiwi to fall even further in the weeks and months ahead. How low the Kiwi goes will depend on US-China trade tensions, the health of the domestic economy, and whether or not the market has fully priced in the Federal Reserve's tightening cycle.

The New Zealand dollar has been on a steady decline since mid-April, with limited support at key technical levels bringing the currency to prices not seen since early-2016. According to Milford Assert Management portfolio manager Mark Riggall, the currency drop could still have a long way to go: "We can certainly envisage it falling further, maybe towards the low 60 cents against the US dollar... First, we've got the US versus the rest of the world trade war, and this is potentially impacting on global growth and as an export nation this means the New Zealand dollar is under pressure."

While concerns about the US-China trade war have been muted over recent days, New Zealand and Australia are particularly susceptible to rising trade tensions due to our export-driven economies. Like practically every other county in the world, the New Zealand currency is also at the whim of the US Federal  Reserve and its interest rate decisions. The Fed has already raised its benchmark interest rate for the third time this year, with plans in place for another hike later this year, three more in 2019, and at least one more in 2020.

While President Trump recently told reporters “I think the Fed has gone crazy”, the yield spread between US and New Zealand interest rates continues to place downward pressure on the Kiwi. While New Zealand interest rates are not that different from US rates, at 1.75 percent and 2.25 percent respectively, the last time rates increased in New Zealand was mid-2014. New Zealand's declining business confidence is also having a negative effect on the dollar and could translate into lower domestic growth.

According to Riggal, "I think offshore investors probably pay less attention to the evolving business confidence situation here, but we're certainly seeing a lot of headlines about it locally... That's driving domestic investors such as ourselves to reduce New Zealand dollar holdings or increase our foreign currency holdings and, similarly, exporters who are potentially hedging their foreign currency revenues may reduce some of their hedges – so that may have a negative impact on the New Zealand dollar." Local economic data has already been unimpressive, with the Kiwi let down by softer global dairy auction results and Institute of Economic Research Business Confidence results which highlighted weaker earnings.

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