Currency finds rare joy in Oz cross

While the New Zealand dollar's ongoing gains and volatility against the greenback continue to be a headache for exporters, its relatively low level and stability against the Australian currency are proving to be a rare bright spot amid the economic gloom.

Closing last week at just under A80c, the kiwi has traded in a fairly stable albeit slightly rising range against the Australian unit for the past four or five months, says Westpac market strategist Imre Speizer.

"We thought it would head lower and test the bottom of the range based on the more bullish Reserve Bank of Australia versus the the dovish RBNZ but it hasn't actually respected that yet. If anything the price action is pushing the kiwi higher against the aussie."

Over the short term, Speizer said the outlook was somewhat fuzzy but it was likely that price action would continue to incrementally favour the kiwi.

Longer term he expected the movement to continue in the same direction with the market responding to economic fundamentals such as stronger net migration in New Zealand and the fact that being in a deeper hole than the Australian economy, which has not fallen into recession, New Zealand's relative rate of recovery will be stronger, albeit to absolute levels of GDP growth less than that of our transtasman neighbour.

Having said that, it was likely to be some time before the kiwi/aussie cross reached what Westpac regarded as its long term average of A83c. The transtasman pair was actually one of the only cross rates on which the kiwi was trading below its long-term average, he added.

"There are some relatively strong reasons why the NZ-Australian cross is undervalued and that undervaluation is almost certainly going to persist for a reasonable period of time," says Earl White of Bancorp Treasury Services.

For one thing, the Australian economy appeared to have dodged a recession and also with the current differences between the stances of the central banks of both countries, international investors were less inclined to take speculative risk in the New Zealand dollar compared to the Australian unit, particularly given the unusual situation of our official interest rates being lower.

"So you've got two things keeping that cross down."

White said that situation, in normal circumstances, would tend to correct as Australian companies, fund managers and households purchased New Zealand dollars in order to acquire New Zealand assets at what are, thanks to the currency differential, bargain prices.

"But because investment markets are much more constrained because of the credit crisis and all those other wonderful things, you're not seeing the managed funds or private equity guys pouring money across the ditch to buy New Zealand assets"

The relative weakness of the local unit had already proved a "a huge benefit to our tourism numbers". The positive effect from the low cross was offsetting some of the weakness in demand from other overseas markets and as such, "... we need this cross to stay low for quite a while yet".