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Currency Focus: Kiwi strength vs A$ underpinned by migration, commodity prices

Friday 18th September 2009

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(BusinessWire) – The New Zealand dollar may extend its gains against the Australian dollar to an eight-month high as the nation’s export commodities outperform and inbound migration stokes the economy, according to Westpac Banking Corp. economists.

The kiwi dollar has climbed more than 5% to 81.52 Australian cents from its low in May. It may reach 84 cents Australian cents this year, Westpac economist Dominick Stephens said in a report. Prices of New Zealand’s commodity exports, such as dairy, meat and wool, have climbed 12% in U.S. dollars since February terms, according to the ANZ National Commodity Price Index. The Reserve Bank of Australia’s Index of Commodity Prices fell 15% in the same period. Net migration is on track to reach 25,000 this year, from 3,800 in 2008, according to Westpac, stoking demand for houses and the goods to furnish them.

“The difference between New Zealand’s and Australia’s prospects has turned out smaller than markets expected,” Stephens said. “The exchange has, correctly, appreciated to reflect that.”

The prediction of a strengthening kiwi against the Australian dollar puts Westpac at odds with Reserve Bank Governor Alan Bollard, who this month called the high exchange rate “the most vivid illustration of gains that are at odds with relative economic developments.”

Bollard is predicting the New Zealand economy climbed out of its deepest recession in 30 years this quarter, headed for a patchy recovery, while Australia’s economy has skirted the R word altogether.

Jenny Fagg, chief executive of ANZ National Bank, told BusinessWire that the kiwi dollar’s strength versus the Australian dollar “doesn’t make sense.”

“Australia’s fundamentals are much stronger than New Zealand’s - for the kiwi to keep, more or less parity or be high against the Aussie is surprising - you have to put it all down to people throwing down the U.S. dollar,” Fagg said, referring to the currencies colloquially.

Bollard this month said interest rate spreads between New Zealand and Australia were falling as investors “become increasingly confident that the Reserve Bank of Australia will soon begin returning its policy rate to higher levels.” He has vowed to keep New Zealand’s official cash rate at around its record low rate of 2.5% until the second half of 2010. Australia’s benchmark rate is 3%.

Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney, said New Zealand interest rates need to keep in line with Australia’s and she doubts Bollard will hold the official cash rate at its current level for too long. The RBNZ “will need to hike rates not far behind the RBA,” she said. “The threat to keep rates at or above current levels just isn’t credible.”

Property values in New Zealand have climbed for four straight months as inbound migrants stoke demand for housing, while a drop off in the issuance of new building permits has stemmed supply, according to QV Valuations data.

Bollard has slashed the OCR by 575 basis points since July last year, the steepest series of cuts since the bank adopted the benchmark rate a decade ago. The RBA’s 3% rate is the lowest in half a century, as Governor Glenn Stevens took action to avert a recession.

The prospects for Australia are improving, according to the minutes of the RBA’s September board meeting. Still, the recovery isn’t yet strong or certain enough for the central bank to consider introducing a time line to hike rates.

The pick-up in the trans-Tasman economies has also underpinned the appreciation in the kiwi dollar, which is still 5% below its inflation-adjusted average of 85.6 Australian cents, according to Westpac’s Stephens. With New Zealand’s inflation rate consistently lower than Australia’s, the currency has been in an upward trend since 1986.

“New Zealand’s GDP growth is no longer underperforming Australia’s by such a wide margin, and forecasts are for similar growth,” he said.

Businesswire.co.nz

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