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US dollar parity: Australia's pain is our gain

The Australian dollar hit parity with the US dollar last night, ushering in what could be a mini earnings boom for New Zealand companies with exposure across the Tasman.Dealers said the Aussie dollar hit a high of $US1.0003 at 1.18am Saturday morning New

Jamie Gray
Sat, 16 Oct 2010

The Australian dollar hit parity with the US dollar last night, ushering in what could be a mini earnings boom for New Zealand companies with exposure across the Tasman.

Dealers said the Aussie dollar hit a high of $US1.0003 at 1.18am Saturday morning New Zealand time, its highest point in 28 years (by 8am Saturday morning it had settled back to $US0.98).

It was an all-time high since the Australian dollar was floated in 1983.

The breakthrough was driven by US dollar weakness, high interest rates, and a commodity that is in hot demand at the moment – gold.

The kiwi has been left in the dust, to the point where it is now trading at near 10-year lows on the Australia/NZ dollar cross rate. The cross rate trades at around A76.53 cents after hitting A94 cents several times over 2004, 2005 and 2006.

Like the Aussie, kiwi has been trending up against the greenback, but not nearly to the same extent.

Silver linings
While the kiwi’s rise against the US dollar doesn't do exporters any favours, those exposed to New Zealand’s biggest trading partner across the Tasman will be happy, according to Moody’s Analytics.

“What has been termed a global currency war has a silver lining for New Zealand, with kiwi appreciation unlikely to derail export growth,” Moody’s said. “The kiwi is actually falling against the Australian dollar, improving New Zealand's export competitiveness against its biggest customer,” the agency said.

BNZ currency strategist Mike Jones said both the Aussie and the kiwi have stood out as better prospects among yield-seeking foreign investors, while the U.S. dollar falls foul of central banks and investors alike.

“We are seeing the Aussie close in on parity (with the US dollar) but the New Zealand dollar versus the Aussie dollar is very low, and that looks entirely appropriate given the contrasting fundamentals between New Zealand and Australia,” Mr Jones said.

“New Zealand’s economic growth is stuck in a low and slow phase and we don’t think we are going to see growth of the order that Australia is seeing now until mid next year,” he said.

No more “cash and carry”
It is as if the kiwi and Aussie dollars have swapped roles. The kiwi, once a favourite of foreign investors seeking yield from the so called “cash and carry” trades, has lost its attraction. Now that there are better rates to be had across the Tasman, the hot money has switched into the Aussie dollar instead.

“We are not seeing that same speculative carry trade in the New Zealand dollar, which is one of the reasons why the kiwi dollar is not higher than it already is,” Mr Jones said.

The Australasian currencies, which have in the past had a habit of moving in tandem with each other, are diverging, but Mr Jones says it’s too early to tell whether there has been a structural shift in the relationship between them.

Economies diverge
The two economies are at different stages. The Reserve Bank of NZ has its official cash rate on hold at 3.0% and is expected to keep it there for the rest of the year at least, while the Reserve Bank of Australia has its rate set at 4.5%, and is expected to keep tightening.

Mr Jones expects the cross rate to remain under 80Ac until the end of the year at least.

“That cross rate is going to remain relatively weak and is going to be a sizeable support for the New Zealand economy, and it is one of the reasons why we see economic growth picking up early to mid next year,” he said.

Australian visitors are already hopping across the Tasman in greater numbers to take advantage of the lofty AUD/NZD exchange rate.

In the year to August 2010, an extra 88,000 Australian tourists entered the country, representing 84% of the total annual growth in tourist numbers.

Aussie exposure
A large number of New Zealand listed stocks already have exposure, in some form or other, to Australia.

Some examples are: carpet manufacturer Cavalier Corp, construction and building products manufacturer Fletcher Building, resins maker Nuplex Industries, home appliance maker Fisher and Paykel Appliances, children’s clothing specialist Pumpkin Patch, jewellery retailer Michael Hill International, casino owner operator Sky City Entertainment, and Australasian tourism operator, Tourism Holdings.

Forsyth Barr head of research Rob Mercer said the kiwi’s weakness against the Australian dollar is likely to be temporary, because he expects to see an export-led economic recovery over the next 12 months.

And the brokerage has a bullish view of the local share market. “We have reviewed the New Zealand equity market’s fundamentals and outlook and believe the timing is now right to achieve a 12-month gross return in excess of 20%,” Mr Mercer said. Those with exposure to Australia should feature strongly, he said.

Jamie Gray
Sat, 16 Oct 2010
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US dollar parity: Australia's pain is our gain