Dollar not expected to reach parity with Aussie this year

The New Zealand dollar, which touched an eight-year high against its Australian counterpart this month, is not expected to climb to parity in 2014 as a strong local currency dents exports and Australia's economy picks up following the end of a mining boom.

Just three of 22 currency analysts and economists in a BusinessDesk poll expect the New Zealand currency to trade on a par with the Australian dollar this year. The New Zealand dollar recently traded at 93.87 Australian cents and reached 95.31 cents on Jan. 24, its highest since December 2005 when it touched a post-float high of 95.82 cents.

New Zealand's currency has accelerated 17 percent against the Aussie in the past year, as a strengthening local economy contrasts with a slowdown in Australia. New Zealand Reserve Bank governor Graeme Wheeler signalled in his six-weekly review of interest rates today that a hike is likely to be needed "soon" to contain inflation, while in Australia Governor Glenn Stevens is considered less likely to cut interest rates further this year.

"As the RBNZ gets on with the job of tightening monetary conditions while the RBA remains on hold, the bias is for the NZD/AUD to head higher," Bevan Graham, chief economist at AMP New Zealand, said in an emailed comment. "However our economics team in Australia thinks the RBA will be tightening from late third quarter/early fourth quarter this year, at which point we'd expect the cross to start heading lower."

The two currencies were last at parity in 1973, when they were both fixed. Benchmark interest rates in both countries are at an historic low of 2.5 percent. The yield on New Zealand's benchmark 10-year government bond was recently at 4.62 percent, almost 60 basis points higher than its Australian equivalent.

Australia's central bank next reviews interest rates on Feb. 4. Analysts have pulled back their expectations for a rate cut in coming months following recent stronger data on inflation and business confidence.

Traders expect Australian interest rates to remain largely on hold this year, while the chance of a rate cut at next month's meeting has fallen to 3 percent from 14 percent on Jan. 17, according to the Overnight Swap Curve. New Zealand's Reserve Bank is expected to raise its benchmark rate at its next review in March after leaving it unchanged today.

The cross rate is already pricing in the benefits of a stronger New Zealand economy versus a weaker Australian economy with the kiwi at 95 Australian cents, said Peter Cavanaugh, client advisor at Bancorp Treasury.

A stronger local currency is likely to dent New Zealand's manufacturing export and inbound tourism sectors, providing a self-dampener to parity, Cavanaugh said.

Australia is New Zealand's second-largest trading partner after China, and the biggest source of short-term visitors.

Some analysts said there remained a small risk the currencies would trade evenly for a short period even though it was not their core view, should Chinese demand fall suddenly, the RBA turn very dovish or the RBNZ prove more hawkish than expected.

"While chatter of the cross moving to parity now abounds, we believe this is likely misplaced," Kymberly Martin, markets strategist at Bank of New Zealand, said in a note today. "We continue to emphasise the cross is stretched relative to fundamental 'fair value."

(BusinessDesk)