by Joanne Masters

The New Zealand dollar hasn’t gone one-for-one with the Aussie dollar for 40 years. Could this happen in the near future? Jo Masters explains.

The Aussie and New Zealand dollars have much in common. Both are commodity currencies (albeit with New Zealand’s being agriculturally based), both are traditionally high yielders, and both benefit from strong risk appetite. As a result, these two currencies often compete for global funds. 

Indeed, $A/$NZ has been one of the most watched currency pairs in recent months, and no wonder as the pair brushed perilously close to historic lows in January and again in mid-March.

The Aussie has been under-performing its antipodean cousin for over a year now (see chart), with the cross ($A/$NZ) falling to 1.0493 on 24 January and then 1.0540 on 12 March. The pair has not been below 1.05 since December 2005, when it hit a record low of 1.0434, before bouncing to 1.07 within a matter of days.

Similar to 2005, the $A has found support around those lows on several occasions recently. Equally though, the domestic unit has failed to generate enough momentum to break above the all–important 1.0880 level.

With the $A holding support, but failing to break resistance, many are wondering if this is the pause before a run toward parity, or the calm before a serious attempt higher. For the record, the $NZ has not found parity against the $A in 40 years! What happens next is important for Australian businesses with New Zealand our 6th largest trading partner.


A quick look at an economic scorecard clearly highlights the relatively strong economic underpinnings for the $NZ. That is not to say that Australia’s economic outlook is compromised, but remember currencies are all about relativities. And New Zealand’s relative strength at present was again highlighted by the release of its 2014/15 Budget just days after Australia’s.

New Zealand announced an expansionary, family friendly Budget, with a return to budget surplus projected in 2014/15. Moreover, NZ Prime Minister John Key has said there may be room for tax cuts ahead of September’s election (and this off a top marginal tax rate of just 33%).

Budget forecasts showed NZ economic growth strengthening to 4% in 2015, from 3% in 2014, while inflation is expected to rise to 1.8%, from 1.5% (note: these forecasts are March years, not June years as in Australia).

Much has been written about the Australian Federal Budget, but in summary it’s not friendly to anyone, with surpluses a distant five years away. Moreover, Treasury is forecasting economic growth to moderate to 2.5% in 2014/15, from 2.75% this year. Not surprisingly, inflation is expected to moderate to 2.25% in 2014/15.

As you know, I believe currency markets are not too interested in Budgets but the comparison of the two is rather stark. Currency markets do care about interest rates – or more specifically relative interest rates. And here is where the underpinnings for $NZ over $A come to the fore.

The Reserve Bank of New Zealand (RBNZ) has commenced its rate hike cycle, with two consecutive rate hikes this year already taking the cash rate to 3%, from 2.5%. Moreover, many believe the RBNZ will hike again in June and continue to normalise monetary policy settings in the months ahead, taking the cash rate to 4% in 2015.

In contrast, while the chance of any further rate cuts in Australia has diminished, the timing of any rate hikes is well in to the future. Indeed, respected economist Saul Eslake shifted his view last week and now sees the RBA on hold until 2016. And he is not alone. So, that leaves local rates at 2.5%, with NZ rates at 3% and on the rise in a matter of months.

Against this backdrop, it is little wonder that the $NZ has found favour amongst investors. That explains the strength in the $NZ, but it does not explain why $A/$NZ has held support levels and where the cross rate may head next.

The outlook for both Australia and New Zealand’s commodity prices depends critically on China. While the $A is currently absorbing lower iron ore prices, so too the $NZ is absorbing lower milk prices. (And don’t underestimate milk, the dairy industry is New Zealand’s largest export earner).

One factor that is limiting further falls in $A/$NZ is market positioning. There’s little doubt that the market is already short $A/$NZ, and it seems risky to add to that when the cross rate is already around recent lows.

Moreover, much of the ‘good’ news is already priced in the $NZ. The RBNZ is expected to raise rates, and the risk seems more likely that the pace of tightening will be slower than expected (particularly if the $NZ remains so strong), rather than faster than expected.

In addition, part of the strong economic outlook is underpinned by the estimated NZ$40 billion of expenditure in rebuilding Christchurch after the 2011 earthquake.

While $A/$NZ could well spend a few more months bouncing in recent ranges, I expect the next break will see the cross-rate higher. With much of the ‘good news’ already priced in to the $NZ, a push to parity, to new territory, would require something new, something unexpected, it is difficult to see what that could be.