News » Kiwi Dollar Edges Towards Parity With AUD

13.01.15

Kiwi dollar edges towards parity with AUD

A differing outlook on interest rates has driven the New Zealand dollar to its highest level against the Australian dollar since the latter was floated by Treasurer Paul Keating in December 1983.

The Australian dollar had sunk at $1.046 against the New Zealand dollar in late afternoon trading on Monday, raising the prospect of parity between the two currencies for the first time in 30 years.

Like the Australian dollar the Kiwi has fallen against the American dollar in recent months, dropping from US88¢ six months ago to US77.66¢ by late afternoon trading on Monday.

But at the same time as it has sunk against the greenbank, the New Zeala
nd dollar has made impressive gains against the Aussie.

Westpac chief currency strategist Robert Rennie said the weakness in the cross could be attributed to several drivers.

“One obvious [driver] is the ongoing weakness in iron ore markets,” he said.

“I think everyone would agree that one of the key messages when you look back on 2014 is the fact that iron ore fell further and faster than most, if not all, financial markets’ experts expected.”

A key contributor to this, he said, was weakness in the Chinese economy, particularly in the real estate and construction sectors, where steel is a key component.

Another driver is the strong New Zealand economy. Strong migration numbers “which met and beat expectations by a significant degree”, as well as strong agricultural prices bolstered the New Zealand economy, Mr Rennie said. 

“But the key really was the Reserve Bank of New Zealand’s monetary policy stance”, which was “very different from the neutral policy guidance we had from the Reserve Bank of Australia through much of this year.”

In particular, the RBNZ highlighted that further increases in the official cash rate are expected to be required despite significant weakness in dairy prices at the end of the year.

People have also been rethinking their expectations over what the RBA might do in the first half of next year, said Michael Turner, currency strategist at the Royal Bank of Canada.

“So it was really an interest-rate driven move whereby the Aussie was suffering from lower interest rates at the front end and the Kiwi was doing the opposite.

“That’s why the Aussie-Kiwi cross has dropped down to historically low levels.”

While the weakness against the New Zealand dollar is a boon for the Australian export industry, the impact would be minimal, Mr Turner said.

“It’s definitely important from the New Zealand perspective but from the Australian exporter perspective, at the aggregate level, it’s probably not something we’d take too much notice of.

“It’s not really something that’s going to be moving the needle.”

Read more: http://www.smh.com.au/business/kiwi-dollar-edges-towards-parity-with-aud-20141229-12f2xh.html#ixzz3OfOYleL4

Extracted from The Age, Tuesday December 30th 2014. Written by Lisa Visentin