News: As yield allure lifts NZ dollar, cenbank could be forced to ease again this month

• Renewed upsurge in NZ dlr may force another rate cut soon
• Kiwi dlr benefitting from cautious Fed, attractive NZ yields
• Higher exchange rate puts more strain on vital dairy sector

A resurgent New Zealand dollar is making life harder for the nation's central bank, putting more pressure on the South Pacific island's vital dairy exports and raising the chance of another interest rate cut as early as this month.

Nicknamed the Kiwi after New Zealand's iconic flightless bird, the local currency has nevertheless flown sky-high since the U.S. Federal Reserve last month backed away from a more aggressive path for interest rate rises.

It scaled a 10-month peak at $0.6968 last week, and is currently sitting at $0.6815 - a good distance from the year's low at $0.6348 reached on Jan. 20 - as yield-hungry investors continue to plough funds into New Zealand dollar-denominated assets amid low rates in Japan, Europe and even the United States.

On a trade-weighted index basis the Kiwi is around 3 percent higher than the central bank forecast it would be in the June quarter.

"It seems nothing can get the Kiwi down," said ANZ bank economists in a note to clients.

That might force the Reserve Bank of New Zealand to ease policy at the April 28 meeting, after it surprised financial markets last month by cutting the cash rate a quarter percentage point to 2.25 percent. The RBNZ is striving to reignite an economy hit by a slump in prices for its key dairy exports, weakening global demand and low inflation.

"An April (rate cut) is very much in play particularly if the NZD continues to hold up at current levels," said Stephen Toplis, head of research at BNZ whose base case is for the next rate cut to occur at the June policy review.

The central bank has identified the dairy sector, with more than 85 percent of farmers currently grappling with losses, as a key risk to financial stability. Needless to say a strong currency is adding to the strains on the sector by eroding the value of export receipts.

"It's a very real problem with current farm-gate returns leading to losses for a large proportion of the industry," said ANZ Rural Economist Con Williams.

Moreover, in the short term, the high Kiwi threatens the central bank's inflation target because it suppresses the prices of imported goods.

BNZ's Toplis said the central bank will have trouble delaying another rate cut as it's mandated to keep inflation between 1 percent and 3 percent. Annual inflation is currently 0.1 percent.

The challenge for the RBNZ is that a few more rate cuts - some predict the cash rate will move to a record-low 1.75 percent in coming months - could still fail to put a significant dent in the Kiwi as investors move funds from ultra-low bond rates elsewhere in the developed world in favour of New Zealand.

At 2.0 percent, the 2-year bond yield in New Zealand is well above the likes of Germany at minus 0.5 percent and the U.S. at around 0.7 percent

It may not all be smooth sailing for the Kiwi, however. On Tuesday a tepid business confidence report weighed on the currency.

A potentially less-dovish tone at the Reserve Bank of Australia rate review later Tuesday and events like Wednesday's GlobalDairyTrade auction may also take some of the shine off the Kiwi.

"It wouldn't be a surprise to see the NZD slide back into the previous range as these high levels will be giving the kiwi a touch of vertigo," said OM Financial Limited Private Client Manager Stuart Ive.