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YEAR IN REVIEW: NZ dollar’s gains vs Aussie show diverging economies, supremacy of milk

The New Zealand dollar's 17% rally against the Australian dollar this year highlights the diverging paths of the two Down Under economies, as dairy products lead continued strength in soft commodities and demand wanes for iron ore and coal.

The kiwi started the year at 79.58 Australian cents and recently traded at 92.78 cents, touching a fresh five-year high of 93.04 cents after New Zealand reported stronger-than-expected third-quarter growth.

New Zealand's economy is on a tear, driven by the rebuilding of earthquake damaged Christchurch and a surge in dairy commodity prices. By contrast, the Australian economy is coming off its highs as it waits for other sectors to take up the slack from a mining boom that has peaked.

"It's been a pretty stellar year for the kiwi dollar - what has been highlighted is its diverging prospects with Australia," said Hamish Pepper, a Singapore-based currency strategist at Barclays Investment Bank, which is one of the world's top three currency trading banks.

"Usually we have been able to rely on quite strong correlations between movements in the kiwi dollar and movements in the Aussie dollar and that has broken down this year," he said. "The kiwi has really outperformed its Antipodean partner by a significant degree."

The New Zealand dollar has outperformed as dairy prices continued their upward climb after farming recovered from a drought this year and as demand for housing in Auckland and Christchurch pushed up prices.

"Ultimately the central bank will have to respond to that through higher interest rates," Mr Pepper said. "New Zealand is priced to be the first G-10 central bank by a long way to start tightening policy and that is coming through in the currency. That is a big driver of its outperformance."

Traders are pricing in 123 basis points of hikes to the New Zealand benchmark interest rate over the next year, with a 34% chance of hike at the next meeting in January, according to the Overnight Swap Rate.

Meanwhile in Australia, traders see a 2% chance the Reserve Bank will cut rates at its next meeting with just 10 basis points of hikes priced in over the next year.

"For so long you were able to think about the Aussie dollar and the kiwi dollar as being roughly the same because if you were looking to get commodity currency exposure it wouldn't matter too much which of those currencies you chose," Mr Pepper said.

"Now I think 2013 has shown you that actually it matters to a great degree."

Still, he doesn't expect the kiwi to continue its outperformance in 2014 and says it is unlikely to reach parity with the Aussie as the divergence in the two economies is already priced in.

In the coming year, traders will be focusing on the New Zealand dollar's value against the US dollar after the US Federal Reserve decided at its meeting this week to reduce its monthly bond buying programme by $US10 billion to $US75 billion. Trimming the amount of money it prints should help lift the greenback, which has suffered as the Fed flooded the market with its currency.

The New Zealand dollar started 2013 at 82.74 US cents, touching a high of 86.77 cents and a low of 76.82 cents. The kiwi recently traded at 82.15 cents and Barclays sees it dropping to about 75 cents by the end of next year.

"The 2012 year finished with everybody wanting to have the weakest currency," said Peter Cavanaugh, senior adviser at Bancorp Treasury in Wellington. "When the tapering story came out they suddenly realised, be careful what you wish for because they suddenly found themselves with a weak currency that was caused by a capital flight which was threatening domestic economic and financial stability."

This year's parting thought is that "the world is on standby" waiting for economic recovery that will allow central banks to unwind their monetary largesse, Mr Cavanaugh said.

(BusinessDesk)

Comments and questions
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Will China look to Eastern Europe?

THE END of milk quotas in Europe from 2015 will add another dimension to the global milk supply, says Fonterra chairman John Wilson.
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http://www.ruralnewsgroup.co.nz/rural-news/trending/eu-milk-tipped-for-global-market

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