The NZ$ has moved in a relatively narrow band in recent months, between US$0.82 and US$0.85/NZ$, reflecting resilience in Chinese demand, which has lifted sentiment toward commodity-exporting currencies. Low rates and unorthodox policies in the G-7 countries have also underpinned liquidity conditions and bolstered the appeal of local assets. Confidence in New Zealand is reflected in renewed momentum in the economy, despite a fiscal austerity drive by the government and a redistribution of earnings in the diary industry caused by widespread drought. The country, though, remains highly indebted and the bubble in the real estate sector is a threat to recovery prospects. It is also not immune to the crisis in the euro zone periphery and swings in risk aversion, nor the threat of a potential slowdown in China. Some warn that relative strength of internal demand may act as a liability alongside an overvalued exchange rate, as it could send the trade balance into the red and exacerbate the large current account deficit (5.1% of GDP in 2012). Recent statements from the government indicate that it will not intervene to weaken the NZ$, not least because such a move would be expensive and may prove ineffective. Yet currency-competitive dynamics is clearly a sensitive issue, especially in view of the downward movement in the Japanese yen and speculation about FX management in other countries. The Reserve Bank has reiterated that the cash rate will be held at record low levels until 2014, with a possibility that it might be cut in the event the NZ$ moves above levels considered consistent with fundamentals.
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