Kiwi cross rate with Australian dollar may indicate misperceptions, Bollard says

Thursday 5th November 2009

The New Zealand dollar’s relatively stable performance against its Australian counterpart may indicate misplaced confidence that the local economy will keep up with the cranking pace across the Tasman, according to Reserve Bank Governor Alan Bollard.

The immediate prospects for New Zealand and Australia “are different,” Bollard told a meeting of the Trans-Tasman Business Circle in Auckland. “Australia has avoided negative growth, and its prospects are driven by strong terms of trade, vast mineral deposits, the Chinese market, and rapid population growth,” he said.

“New Zealand has had a recession, and the pick-up is slower and more vulnerable – a difference financial markets do not appear to appreciate,” Bollard said. “This is particularly evident in the relatively stable cross-rate on foreign exchange markets. If financial markets can’t see the differences, they will eventually lose money, and it will hurt the New Zealand economy.”

The kiwi dollar traded recently at 79.24 Australian cents and has traded in a range of about 5 cents for most of this year. The kiwi peaked out at 92.32 Australian cents in October 2008.

Australia’s economy managed to skirt the global recession and is now expanding at a sufficient pace that the RBA has seen the need to hike its benchmark rate twice in as many months, to 3.5% this week. New Zealand’s economy emerged from recession in the second quarter though on a weaker track, and Bollard isn’t expected to raise the official cash rate until April next year.

Both countries have survived the crisis well, due to a mix of strong institutions and stimulative policies, Bollard said. And New Zealand could improve its prospects by taking advantage of Australia’s very strong future growth potential.

Unlike New Zealand, Australia is entering a new minerals boom, investing heavily and encouraged by new finds, re-opening markets, bottlenecks and strong prices, he said

Strong investment and export growth would mean big challenges for Australian policy. “This all means an economy that looks less like New Zealand.”

Still, “Australia is a lucky country, but we could be a lucky neighbor,” with the potential to supply manufacturing and services to the trans-Tasman neighbor, he said.

Businesswire.co.nz

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