Kiwi unlikely to match the aussie in next year

LAURA WALTERS
Last updated 05:00 11/01/2014

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The New Zealand dollar is unlikely to achieve parity with the aussie despite healthy economic growth predictions for 2014, currency experts say.

The New Zealand dollar is trading above A92c, after hitting a fresh five-year high of A93.14c late on Thursday night.

The trade-weighted index of major trading partners' currencies hit an all-time high of 78.57 earlier in the week.

HSBC chief economist for Australasia Paul Bloxham, who expects New Zealand's economic growth to hit 3.4 per cent this year, said parity with the Australian dollar is on the cards.

"We have in our mind that New Zealand will achieve parity with Australia this year," Bloxham said.

Parity with Australia has proved elusive, with stories of several parties during the past few decades that saw the Champagne remain in the fridge.

"You might get to pop the Champagne one day this year, but then you've have the hangover the next day," said Bloxham.

ASB head of institutional foreign exchange sales Tim Kelleher said he was around in the mid-90s when a parity party was held in Wellington when the New Zealand dollar hit A96c.

"That was the ding dong high that night," Kelleher said.

"I think you'd struggle to see kiwi-aussie at parity personally, but certainly the fundamentals are a lot better for New Zealand but I think a lot of it's built in already."

Kelleher said he expected the kiwi to trade between A92.50c and A93.50c in the medium-term.

And while the New Zealand dollar was not backing off just yet it was unlikely to go higher.

New Zealand's strong economic story had already been priced into the foreign exchange rate.

"The currency market tends to pre-empt a lot of the fundamental analysis. They're a lot quicker to react."

The New Zealand dollar had swiftly moved from A72.50c in 2011 to A92.50c, he said.

The kiwi could reach A96c, but parity was not on the cards.

"I fundamentally struggle to see how you can say that the New Zealand economy is equivalent of the Australian economy given the economy's scale."

Kelleher said the Reserve Bank's official cash rate announcement at the end of the month could cause some movement as some of the market was expecting an interest rate hike from 2.5 per cent in January.

But the Reserve Bank would be hesitant to hike rates while the TWI was at current levels, he said, adding that he expected interest rates to increase in March.

Meanwhile, the Reserve Bank of Australia was trying to talk their currency lower to avoid cutting interest rates from 2.5 per cent.

"Certainly the New Zealand economy will outperform the Australian economy this year."

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ANZ senior manager of foreign exchange Sam Tuck said the New Zealand dollar traded at parity against the Australian dollar for one day before it was floated, when they were both managed currencies, on October 18, 1973.

Since the New Zealand dollar was floated in 1985 it had spent only 20 per cent of its time above A88.30c.

When asked if the New Zealand dollar would trade at parity with the aussie this year he said, "anything's possible but I don't think it's that likely".

The kiwi had spent only 5 per cent of trading days since 1985 above A92.10 so purely from history, the New Zealand dollar was stretched, Tuck said.

"In order for history to be a guide you have to be of the assumption that there's a long-term structural relationship between Australia and New Zealand and what impacts Australia impacts new Zealand."

The two countries shared the same top trading partners, Tuck said.

For the kiwi to go higher than it had in the past couple of decades something would need to happen that impacted New Zealand that did not impact Australia.

Tuck said there was still "plenty of room" for the kiwi economy to be impacted by interest rate hikes, which would bring the New Zealand dollar down.

There was also "plenty of possibility for the Australian economy to pick up, he said.

"I guess the summary is, I see more possibilities for Australia and New Zealand to converge than continue to diverge."

In the very short-term it was hard to see what could change the New Zealand "goldilocks" story, he said. "In order to change this we need people's perceptions of the economies to change, either one or the other.

- © Fairfax NZ News

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