Australian investments looking cheaper

A new, higher trading bracket looks likely, thanks to the local economy's stronger performance compared with Australia's. Photo / Brett Phibbs

Kiwi dollar has stopped short of parity with aussie but its strength will favour those looking to buy across the Tasman.

It may not be at parity yet with the aussie, but a stronger Kiwi dollar will favour increased New Zealand investment across the Tasman, going some way towards redressing an imbalance that has heavily favoured Australia in recent years, say economists.

The New Zealand dollar stopped short of reaching parity this week, but another test of record highs looks likely in the months to come, particularly if the Reserve Bank of Australia chooses to cut official interest rates at its next opportunity on May 5.

As it stands, Australia is by far New Zealand's biggest investor. According to the latest available data, Australia ranked first in terms of the total stock of foreign investment with $64 billion in 2013 while New Zealand was Australia's ninth-biggest, at A$30 billion.

Regardless of whether the currency hits parity a new, higher trading bracket looks likely, thanks to the local economy's stronger performance compared with Australia's, according to economists.

ANZ Bank chief economist Cameron Bagrie said the currency's perceived "fair value" range had shifted up from A85c-A88c, to A88c-A90c "and it's rising by the day".

"I think there will be a flood of New Zealand cash looking to hoover up Australian assets," Bagrie said. "Those Australian assets, from a valuation perspective, look a lot cheaper."

Bagrie said the exchange rate was reflecting a more fundamental change that was occurring between the two economies, rather than just interest rate differentials with Australia's official rate sitting at 2.25 per cent compared with New Zealand's official rate of 3.5 per cent.

Australia is New Zealand's second-biggest trading partner, so exporters will be feeling the pinch as Australia-derived revenue is repatriated back into relatively fewer New Zealand dollars.

But the stronger kiwi has already paved the way for investment in Australia.

Last December, when the currency was trading at a highly favourable A95.72c, Infratil and the New Zealand Superannuation Fund bought RetireAustralia for $670 million.

"This is a good time for firms to make investment plans because the currency is as strong as it is," said Paul Bloxham, HSBC's chief economist for Australia and New Zealand.

But he said Australia's asset markets were already looking inflated as international investors sought high-yielding returns.

Bagrie expected the parity issue to be revisited soon. He noted the Reserve Bank of New Zealand had long used the words "unjustified" and "unsustainable" in its attempts to talk down the value of the kiwi.

"Just because it's unjustified and unsustainable, it doesn't mean it won't get there."