Kiwi takes transtasman dive

Queenstown will be seen as a desirable residential location for Australians to buy into with their strong dollar

The kiwi dollar is set to tumble to six-year lows against the aussie, providing an export windfall but further fuelling the Australian buy-up of New Zealand assets, including residential property, say market commentators.

ANZ economists said yesterday there was an increasing chance that the kiwi, which last night closed at A81.37c, would hit A75c as Australia's economy outpaced New Zealand's and the local currency's yield advantage was further eroded by an Australian interest rate increase.

The kiwi, which last traded at A75c almost six years ago, has fallen by more than 12 per cent against the aussie since the start of the year.

Westpac expects it to go even lower and trade as low as A72c next year.

Earl White, of Bancorp Treasury Services, said if the kiwi fell further exporters would enjoy a windfall. However, the recent buying spree this side of the Tasman by cashed-up Australian private equity funds and other investors would accelerate.

"If the kiwi does go to A75c it's probably going to be a situation where people are even more attracted to taking assets across the ditch, but I don't see these levels as being sustainable for a long period of time," said White.

"There are some huge private investment funds in Australia that are always looking for homes for their capital and, quite frankly, New Zealand looks pretty attractive at the moment.

"The Australian property funds seem to be buying up every bit of property that comes up on the market at the moment, including hotels and other commercial property, but there does seem to be a residential interest as well.

"We're starting to hear anecdotal evidence of interest, especially in the apartment market, because the yields here are better and they look a bit cheap."

Goldman Sachs JB Were private equity head Paul Chrystal said the lower exchange rate would theoretically make New Zealand businesses more attractive to Australian buyers.

"One would expect people to do an analysis that said 'look it won't be A72c forever, so this is a good time to buy'."

However, he emphasised the quality of the asset was more important than the exchange rate.

"They want the underlying business to be worth buying, but if there's an added benefit from a low dollar, then one would hope for that and take it."

In the property market, however, the exchange rate was much more important.

"Property has an absolute correlation," Chrystal said. "If you talk to property investors they are focused on exchange rates."

Westpac currency strategist Michael Gordon was bearish about the kiwi's prospects against the aussie. He believed it was headed as low as A72c next year, as offshore investors in New Zealand-denominated bonds withdrew their cash in favour of other investment destinations.

The value of maturing eurobond and uridashi bonds denominated in kiwi and Australian dollars would increase from September. While both currencies would be affected as foreign investors moved their money elsewhere, the bonds had provided relatively more support to the kiwi dollar, so it would be hurt most by their withdrawal.

Meanwhile, the Reserve Bank was likely to keep its key interest rate at 7.25 per cent until next year while the Reserve Bank of Australia would probably raise its rate again in its present tightening cycle.

ANZ economists said exporters should be ready to take advantage of the falling kiwi.

"Exporters should be greedy in setting hedge parameters," they said.

White said if the kiwi continued to ease, "exporters would be keen to take significant advantage of the kind of windfall gains they'd get".

"If you're exporting to Australia and you can't make money at A81c, my advice is pack up and give up. If you can't make a buck here, well you should stop doing it."

Losing cents

* The kiwi is likely to continue falling against the aussie.

* ANZ expects the kiwi to hit A75c in coming months; Westpac expect A72c next year.

* Such falls would make New Zealand assets, including property, even more attractive to Australian investors.