Kiwi in sweet-spot behind aussie

Against the Australian dollar, the kiwi is looking very exporter-friendly. File photo / NZH

The rampant Australian dollar may well be hogging the limelight on the world's currency stage, but the kiwi isn't far behind.

Both currencies are being driven by a commodities boom and, in Australia's case, relatively high interest rates. A strong currency is generally a headache for exporters, but for New Zealand exporters, the news is not all bad. The Australian dollar has outpaced the kiwi to the point where the local currency remains weak in comparison - it's about 15 per cent lower than its long-run average.

The aussie last week hit its highest point against the US dollar since floating in December 1983 at US105.82c, having breezed past parity with the greenback late last year.

Against the US dollar the kiwi is trading at US79.44c - not far off its post-float high of US82.35c, set in March 2008.

Against the Australian dollar, the kiwi is still looking very exporter-friendly at A75.43c, compared with its previous two peaks of A91.87c in 2008 and A95.8c in 2005. In March, the NZ dollar hit A72.41c, its lowest point since 1992.

"By New Zealand standards we have seen a very significant pickup in our commodities prices but in the case of Australia, the pickup has been phenomenal," Deutsche Bank chief economist Darren Gibbs said.

"That explains why the kiwi can be strong against the US dollar and sterling but weak against the Australian dollar.'

New Zealand's exports form about 30 per cent of gross domestic product, while in Australia exports make up about 20 per cent. "But the size of the terms of trade shock in Australia is much greater than what we have seen here," said Gibbs.

For Australia, the pickup in the terms of trade is massive - 70 per cent greater than the average over the last decade. In New Zealand's case, it's about 12 to 13 per cent greater.

In the fast-moving world of foreign exchange, a dichotomy of opinion has developed whereby overseas optimism about New Zealand's prospects is far outweighing domestic pessimism, hence its rise against the greenback.

"Offshore investors and speculators are in an optimistic mood - they foresee a recovery globally - and they are picking that with this global recovery the commodity countries will do better than others," Westpac currency strategist Imre Speizer said.

"Commodities and emerging markets are where they are putting their bets, rather than the Old World bloc, and New Zealand just happens to be in that camp and therefore a recipient of those flows," Speizer said.

The strength of currencies like the Australian and New Zealand dollars is also a reflection of a very weak US dollar, which is struggling despite the US Government's attempts to revive that economy. "While the US dollar remains low it is difficult for the kiwi/US dollar exchange rate to fall, if for no reason other than that, the kiwi will remain high," Speizer said.

Another factor supporting the New Zealand dollar is an expectation that domestic interest rates are about to rise. Economists expect the Reserve bank to start clawing back some ground by March 2012, after setting the official cash rate very low at 2.5 per cent. But the interest rate markets are starting to factor in a rate rise as early as December this year.

The currency's new-found strength does not seem to be worrying the Reserve Bank. Governor Alan Bollard said agricultural export prices are likely to remain strong for some time.

Speaking to a farming group this week, Bollard said the bank expected the higher terms of trade to continue to be reflected in the exchange rate, as it is now. The exchange rate would deliver the benefits of the rising terms of trade to the community at large through higher wealth and cheaper imports.

The Australian dollar's meteoric rise has some in the market questioning how long it can last. "All markets correct and sometimes they do it in a small way and sometimes in a big way," Westpac's Speizer said.

"There are more people now holding aussie dollars than ever before - speculative long positions in the aussie are now at record highs."

With commodities prices on a roll, Kiwis will have to pay more for food, but the flipside is that imports will be cheaper because of the strong currency. "It's not all bad when the currency goes up," Gibbs said.

"There is a perception at times that you need to have your currency as low as possible because that helps exporters, but the reality is that you want the highest currency that your exporters will bear," he said.

Bank of New Zealand currency strategist Mike Jones said the strength of the NZ dollar against the US dollar had left a few people scratching their heads, given the state of the economy. "But foreign exchange markets tend to be forward looking," Jones said. "The outlook is still fairly positive and that is going to remain the case as long was we continue to experience these record high terms of trade and the prices for our exports are at record levels."

Jones said there was a possibility the Australian dollar might have gone too far, too fast. "At the moment, there is the possibility of a cyclical peak, but at the same time it is not going to fall as much as it has done, because of the terms of trade boom," he said. "The same applies to the kiwi - because it's a similar story."

Some analysts say the New Zealand dollar appears to have raced ahead of domestic fundamentals, particularly in the aftermath of the Canterbury earthquakes in February and September.

For now, exporters are faced with a strong NZ dollar, a weak Australian dollar cross rate and very high commodities prices. "The bulk of our export sector is commodities based," Deutsche Bank's Gibbs said. "While currency strength is taking the cream off the top, I don't know too many farmers who aren't smiling."