Roger J Kerr shows why the NZD has been outperforming the AUD and may continue to do that

 By Roger J Kerr

A feature of the local foreign exchange market over recent weeks has been the stellar performance of the NZ dollar against the Aussie dollar.

The NZD/AUD cross-rate approaching 0.8300 after dipping to 0.7900 in early March when the RBNZ was more successful at jawboning the Kiwi dollar down.

The NZD has outperformed the AUD against the USD for a number of very good reasons:

· The interest rate gap between the two currencies has been a very reliable and accurate lead-indicator for the NZD/USD cross rate for many years. The interest rate differential on the two respective 2-year swap rates has returned to zero with the recent reduction in Australian 2-year interest rates. A number of years ago when NZ interest rate were 2.5% above Australia’s, the NZD/AUD cross-rate hit 0.9000. Over recent years when NZ interest rates were 1.5% below Australia’s the cross-rate traded to a low of 0.7500. Today with NZ 2-year interest rates equal to Aussie 2-year rates, the zero differential suggests a 0.8300 cross-rate and that is where we are.

· Since the start of 2013 New Zealand’s export commodity prices have zoomed up, whereas Australia’s metal and mining commodity prices have traded lower as Chinese economic data has come out below expectations. Global investors and currency traders have been more prepared to buy the Kiwi dollar on this evidence in preference to the AUD as our underlying economic fundamentals (commodity prices) are superior.

· The RBA maintain a bias to cut their official interest rates, whereas the strong housing market in New Zealand really prevents the RBNZ from considering this. The rising NZD/AUD cross-rate reflects the differing monetary policy stances.

Despite the temporary de-linking of the two currencies that has produced the stronger Kiwi dollar performance, for more than 80% of the time the NZD/USD just follows AUD/USD movements in day-to-day foreign exchange markets.

The AUD has a major support line at $1.0170 against the USD and weaker retail and employment figures out this week in Australia could cause a test of this support area.

The RBA could also spring a surprise cut to interest rates on Tuesday as inflation has moved lower and Chinese demand for Australian resources has slowed up.

The upcoming Australian budget will highlight an increasing fiscal deficit as Federal tax revenues from mining royalties have fallen away more rapidly than expected.

The RBA may well be concluding that the household response to lower interest rates over the last 12 months has not been that positive.

Australian manufacturing is in a parlous state, the strong AUD and high cost structures rendering most industries uncompetitive and thus contracting. Further monetary stimulus in Australia seems warranted.

The major reason why the NZD/USD rate will return to 0.8100/0.8200 is a depreciating Aussie dollar for the aforementioned reasons.


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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at

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The major reason why the NZD/USD rate will return to 0.8100/0.8200 is a depreciating Aussie dollar for the aforementioned reasons.
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