High-flying NZ dollar causes jitters

Currency strategists are not ruling out further gains in the cross rate as interest rates look increasingly likely to go their separate ways. Photo / Thinkstock

Exchange rate becoming a headache for exporters and Australia-originated inbound tourism, says economist

The New Zealand dollar continues to trade at around eight-year highs against the Australian dollar but foreign exchange strategists doubt the currency will hit parity with its transtasman counterpart any time soon.

Even so, at yesterday's high of A94.45c the cross rate was fast becoming a headache for exporters to Australia - New Zealand's second biggest trading partner after China - and for Australia-originated inbound tourism, Deutsche Bank economist Darren Gibbs said.

But for those entities seeking to invest in Australian assets, the high rate offered a rare opportunity to gain exposure to Australian assets at a highly favourable rate by historical standards, said Sam Tuck, senior manager of foreign exchange at ANZ New Zealand.

At present levels, the kiwi is still shy of its post-float high of A95.84¢, set in early December 2005. The currencies were last at parity in 1973, when they were both fixed.

Currency strategists did not rule out further gains in the cross rate as economic conditions in the countries diverged and official interest rates look increasingly likely to go their separate ways, but one said parity between the kiwi and the aussie was "a bridge too far".

The cross rate has appreciated mostly because New Zealand rates are widely tipped to go higher while Australia's are expected to stay put.

Westpac senior markets strategist Imre Speizer said the kiwi had a tendency to overshoot its long-term fundamental "fair value" level by 10 per cent, which could see it briefly hit parity. However, he said a peak of between A96c to A98c was more likely if the Reserve Bank conformed to market expectations and raised its official rate in March.

"Parity is a low chance, but it's not a zero chance," Speizer said.

Westpac expects the currency to continue to appreciate on the cross rate, driven by interest rate differentials, especially since the Reserve Bank is expected to start its tightening cycle in March.

For local corporates, the strong cross rate will be having a negative impact on earnings as their Australian profits are translated back into fewer NZ dollars, one fund manager said.

Companies such as Fletcher Building, which derives about 43 per cent of its revenue from Australia, are likely to be feeling the pinch, both from the currency transaction effect and from import substitution in the building products sector, said Anthony Hall, portfolio manager equities at Mint Asset Management.

Others with high exposure to Australia included EBOS, Kathmandu, Michael Hill International and SkyCity.

"The market is anticipating a crimp on the earnings for these companies due to the high currency," Hall said.

Deutsche Bank's Gibbs said many of New Zealand's exports to Australia were price-sensitive. He said the currency's fluctuations may well hit the Australian inbound tourism market, which has grown steadily over the last few years to the point where well over 40 per cent of visitors to this country are from Australia.