Currency: Kiwi and aussie at 'crucial' juncture

The New Zealand dollar is at a "crucial" juncture against the currency of our largest trading partner, Australia, say currency strategists who point towards private equity capital flows and uridashi maturities as key influences in coming weeks.

Derek Rankin of Rankin Treasury Services expects the kiwi to head back toward the A85c mark as it recovers from an oversold position and receives a boost as Australian private equity players are forced to pump more capital into their sluggishly performing New Zealand acquisitions.

The kiwi, which peaked at over A92c last September, has come off substantially since then and has been trading in a high 70s to low 80s range since the beginning of this year.

But Rankin, who advised clients to hedge their exposure when the kiwi was below A79c, believes some exporters have been complacent about the cross which has been gradually climbing this month.

"If we get through A81c we could be heading towards A85c," said Rankin, citing the cross's historical tendency to swing through ranges of around 10 per cent and his conviction that the kiwi is oversold at current levels given the fundamentals of both countries.

"The other thing I think is really interesting is the way the private equity funds which bought into a lot of New Zealand businesses over the last couple of years leveraged them to hell and basically put all the debt in Australian dollars on the New Zealand balance sheets.

"Since then earnings on those companies have fallen over, they're not seeing the growth they need, and not only that, the exchange rate has gone down so their covenants may have blown out because their debt has gone up in New Zealand dollar terms.

"Their banks are now putting a lot of pressure on them telling them they need to chuck in more equity. These guys have Australian funds so they will be pumping money across the Tasman to help recapitalise and get those covenants in line."

Much of that flow may already have taken place, but Rankin thought it could still help drive further gains on the cross.

Like Rankin, BNZ currency strategist Danica Hampton thought the kiwi might have been oversold against the aussie because "this idea of Australia being the lucky country, that it has skirted the recession, has got a bit overcooked in recent months".

"I can't see a compelling reason for the kiwi aussie to be much lower than A77.5c. That said, we have got to the top of a recent range in the last few days. This is something of a crucial junction as to whether this is, in fact, the top of the range or if it will push higher."

While that remained to be seen, Hampton thought the large amount of eurokiwi and uridashi maturities next month could work in the aussie's favour. With $4.6 billion of the kiwi dollar denominated bonds maturing and only 30 per cent of maturities so far this year being rolled over again, this was a potential drag on the kiwi.

Hampton pointed out Australia's three-year swap yield was 75 basis points higher than New Zealand's and its sovereign rating a notch higher.

"So if you're a uridashi or eurokiwi investor you've got to think hard about why you'd roll those funds over in New Zealand dollars rather than Australian dollars where you'll get better returns and a higher degree of comfort."