Kiwi/Aussie parity could be back on the cards but not overnight

The diverging fortunes of the Australian and New Zealand economies are once again fueling talk of parity between the two nations' currencies, although traders don't expect it to happen overnight.

The kiwi dollar gained about 4 percent against the Aussie in May as the Australian dollar was hit hard by weak iron ore prices and news that major commodities importer China had its sovereign credit rating cut. The New Zealand dollar, meanwhile, pushed higher on a raft of positive data, including a 44-year high in the first quarter terms of trade, improving business confidence and news that Fonterra Cooperative Group predicted a higher milk payout for 2018.

New Zealand's budget also painted a better picture as an improving fiscal position allowed for increased benefits and net debt reduction while in Australia a new levy was imposed on the banking system to help plug a budget hole.

New Zealand's official cash rate is also steady at 1.75 percent while Australia's cash rate is at 1.50 percent, adding to the kiwi's allure. Not only that but New Zealand's improving outlook may mean its central bank lifts rates before the Reserve Bank of Australia. The RBA is due to make a rate decision later today and is widely expected to keep interest rates unchanged.

The kiwi recently traded at 95.72 Australian cents.

"Recent weakness in the AUD reflects the market adopting a fairly negative disposition toward the Australian economic outlook," said Bank of New Zealand currency strategist Jason Wong. Tomorrow's first quarter gross domestic product data across the Tasman is expected to show quarterly growth of 0.2 percent and 1.6 percent on the year, according to a Reuters poll. "Overlay that with weaker terms of trade as the country's key export commodity prices tumble, and the picture is even weaker in nominal terms," Wong said.

In contrast, New Zealand's GDP figures are expected to improve, particularly in nominal terms. Wong tips nominal GDP growth to be about 6.6 percent in calendar 2017 and said the 5.1 percent quarter-on-quarter boost to New Zealand's first quarter terms of trade "highlights the income boost that will be sloshing around the economy over the year ahead."

Wong forecasts the kiwi dollar will hit parity with its Australian counterpart by early 2019 "but given the typical error bands around forecasts, this could easily occur much earlier," he said.

Tim Kelleher, head of institutional foreign exchange sales at ASB Bank, said sliding hard commodity prices and the weaker outlook for the Australian economy versus the New Zealand economy meant parity "is looking more likely this time round." He said a key focus will be Australia's first quarter GDP figures tomorrow but "definitely from afar we seem in a far better place."

ANZ Bank New Zealand chief economist Cameron Bagrie also expects the kiwi to grind higher rather than spiking suddenly. The "stars (terms of trade, growth, unemployment and policy) are in the NZD's favour," he said. "I reckon will have another crack at parity in the next 12 months."

It's not the first time there's been talk of a parity party. In late 2005, bars in Wellington reportedly had champagne on ice but never got to pop those corks. In April 2015 the Kiwi hit around A$0.9979, the closest it has gotten to parity since the two currencies free-floated in the 1980s.

(BusinessDesk)