By Roger J Kerr
Over recent weeks the Kiwi dollar has outperformed its Australian counterpart against the US dollar on global forex markets.
As a result, the NZD/AUD cross-rate has moved up to record highs of near to 0.9700.
The NZ dollar has appreciated by three cents to above 0.7500 against the USD, whereas the AUD has only managed to stabilise in the 0.7700/0.7800 region to the USD.
Over recent weeks this column has highlighted several potential changes in the local FX market that would suggest the NZD is well over-extended in its value relative to the AUD and the NZD/AUD would pull-back down from 0.9650 to lower levels.
One of those changes is due to the natural ebb and flow of speculative activity in currency markets.
With Australia actually cutting their interest rates and New Zealand remaining on a neutral monetary stance there was a wave of short-term speculative buying of Kiwi dollars against the Aussie dollar.
These speculative trades pushed the NZD/AUD cross-rate up from 0.9200 to above 0.9600. However, like all speculative position taking in foreign exchange markets there always comes a time when the reasons for continuing to hold the position are less compelling and profit-taking, or closing out the original position by doing the opposite trade takes place.
We may well be witnessing the first phase of profit-taking on long NZD, short AUD positions entered earlier this year.
The NZD/AUD cross-rate has already reversed engines from 0.9650 to 0.9590 today and further unwinding of the speculative trades seems likely this week.
Another major force behind new and fresh AUD currency buying, which I highlighted a couple of weeks ago, is a new wave of foreign capital and investment inflows into Australia and thus the AUD.
I was expecting international portfolio share investors to take advantage of the lower AUD/USD exchange rate entry point into Australian equities that appeared considerably less fully-valued compared to other share markets. The Australian sharemarket has already zoomed up in recent weeks, indicating that the smart money is already buying Australia.
Last week’s announcement that Japan Post are making a AUD6.5 billion bid for the listed Toll Holdings transport/logistics company at a 50% premium to the share price at the time is a classic example of how foreign investors see value in Australia relative to other markets.
The Japanese are generally not into hedging balance sheet FX translation risk by funding the takeover in AUD’s, therefore one would eventually expect direct capital inflows from Yen into AUD if the takeover succeeds.
The FX markets may be already anticipating and pricing the AUD up ahead of this expected cross-border flow.
A smaller local example of a relatively cheap entry into Australian investments was the early January announcement that Infratil and NZ Super Fund were jointly buying an aged-care company, RetireAustralia for AUD640 million. The current low AUD currency value against the NZD was one reason cited for the attractiveness of the Aussie investment.
Renewed global investor interest in Australia with a currency that has arguably has been oversold, coupled with the RBNZ likely to talk the NZ dollar down again in their 12 March Monetary Policy Statement, suggests more downward pressure on the NZD/AUD cross-rate to 0.9400 and 0.9300 over coming weeks.
The old adage of selling the Kiwi against the AUD as soon as you read media reports of bank’s predicting parity parties still holds!
The Australian influences above should see the NZD/USD rate move back to the 0.7300/0.7400 region in the short-term as opposed to staying above 0.7500.
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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 rogeradvice.com