The New Zealand dollar's outperformance over the past month has been exceptional, BNZ currency strategist Raiko Shareef says.
From hitting the BNZ year end targets earlier than expected, they now seemed far from reach.
''For us, the strong recovery is illustrative of the wide ranges we expect to prevail over the coming 12 months. Overall, we still forecast the dollar to underperform major currencies.''
The initial rebound from September's low came from a wholesale improvement in global investor risk appetite, he said.
The New Zealand and Australian currencies lifted along with Asian currencies, equities and commodity prices. Investors appeared to take a ''relatively sanguine view'' of the world, preferring to cheer the lower for longer United States view than fear for global growth.
More recently, US Federal Reserve officials had broken away from a near unanimous view US rates would rise before the end of the year, Mr Shareef said.
The change in view came after repeated US data disappointments, including employment and consumer spending.
''Such outcomes mean there is virtually no chance of US rates lift off later this month, leaving just the December meeting to close out the year.''
The market priced only a 27% chance of a rate hike in December and the US dollar had been sold off aggressively as a result, he said.
In New Zealand, Reserve Bank governor Graeme Wheeler made it clear while another 0.25% cut was possible on the official cash rate, he was in no mood to cut rates aggressively, Mr Shareef said.
New Zealand economic data had improved its tone, suggestive of firm second half growth. But the prospect of an El Nino driven drought skewed the risk to growth in 2016 to the down side.
There was a great deal more uncertainty about the near term direction for currencies than there was just a few months ago, he said.
The central scenario envisaged the US dollar continuing to rise in relation to peers and for volatility to remain high. That combination should be strongly negative for the kiwi.
''We are wary this current spell of investor optimism will turn, perhaps on renewed emerging market fears.''
Looking ahead, the BNZ anticipated sharper swings and wider ranges in the New Zealand dollar as its strong correlation with risk appetite persisted.
There would be no surprise to see the NZD USD cross rate trade at both ends of the US60c to US70c range several times before finally touching the March 2016 target of US60c, Mr Shareef said.
The crosses
NZD-AUD: Short end rate spreads suggest the cross should be close to A87c. The BNZ expected the cross to fall below A90c before the end of the year and to be A87c by March 2017.
NZD-GBP: It is very unlikely the Bank of England will hasten to increase interest rates before the middle of next year. The pound will clearly outperform the dollar and the cross is expected to fall to 40p by early next year.
NZD-euro: There is a small chance of the European Central Bank stepping in to combat the prospect of lower headline inflation. There is a greater chance of easing in the first half of 2016 and the cross is expected to be 54c by the end of the year.
NZD-yen: There are signs the Japanese Government is focusing on tools to revive the Japanese economy. The cross is forecast to hit 75 by the end of the year.
