Kiwi tipped to slip against the aussie

By ELLEN READ

Relief is in sight for exporters but holidaymakers should make haste across the Tasman as diverging interest rate and growth expectations mean the New Zealand dollar will soften against its Australian counterpart before year end.

Currently sitting around 90Ac, a level it pushed up through on June 10, expectations for the kiwi range from ANZ's 83Ac to 88.2Ac from Citigroup.

With the Reserve Bank of New Zealand expected to end its tightening phase later this year as growth slows while the Australian central bank may have to lift more in the face of a buoyant economy, the kiwi yield advantage against the aussie (and all other currencies) will lessen.

So stronger growth and higher interest rates will make the Australian currency more attractive to overseas investors - at our expense.

Citigroup economist Annette Beacher said her bank's pick is 88.2Ac as the Australian dollar is expected to pick up further against the US dollar (to 76USc) than the kiwi (67USc).

Johnathan Bayley, senior currency strategist at Westpac, takes the middle ground with his bank's year-end forecast at 86Ac.

Shorter term, the kiwi/aussie cross is likely to sustain current levels while the market prices a tightening bias for the RBNZ and a neutral stance for the RBA, he said.

"It will not be until later in the year that the RBNZ will concede its task is complete and the RBA will begin to tighten again," Bayley said - and this is when the kiwi will weaken.

The New Zealand economy is slowing as the world economy peaks - the bond curve is already picking an end to monetary conditions tightening in the fourth quarter and while the Australian economy will also slow it will not be as much as it is much more tuned in to the global economic growth recovery.

"So there is not the same scope for interest rate cuts in Australia as there is here. Therefore the aussie currency will gain an interest rate advantage over the kiwi dollar," Bayley said.

At the other end, ANZ's John Body sees the cross retreating to 83Ac over the next six months.

"We think the combination of a stronger kiwi and higher interest rates will start to slow the New Zealand economy down. A lot of the good news in the local economy is already factored into the economy," he said.

"Conversely the Australian economy has had a reasonably pronounced slowdown in parts ... and we see it rebounding in global growth.

"So we kind of see the Aussie dollar coming back into favour and the kiwi not being as supported by offshore investors," Body said. He suggested that fair value for the cross lay somewhere in the 80-85Ac range.

The average level over the past five years is 83.84Ac.