Analysts cautious as NZ dollar flirts with Aussie parity

Speculation is growing that the kiwi could match the Australian dollar’s value before year’s end.

The New Zealand dollar is again flirting with parity with its Australian peer, but one analyst suspects the landmark day is still at least 12 months away.

Throughout much of this week the New Zealand unit has been trading near a 17-month high of A97.5c, leading to speculation it could match the value of the Australian dollar before year’s end, a result never achieved since the currencies were floated in the 1980s.

Traders are understandably cautious on the prospect, however, given the ‘kiwi’ surged as high as A99.78c in April last year, before fading sharply.

While Capital Economics’ Australia and New Zealand chief economist Paul Dales suspects parity might soon come, the recent strengthening of the NZ dollar could weigh its economy down enough to ensure the day does not arrive this year.

“Our economic forecasts for both countries suggest that the kiwi dollar may rise to parity against the Aussie, but probably not until late next year or 2018,” he said.

Mr Dales tagged the booming NZ housing market as a potential key to the prospect of the NZ currency topping the $A1 mark in the near-term, given trade-exposed groups and the tourism sectors will likely record slower growth given a recent run-up in its valuation.

“With real rates set to fall further, housing-related activity will continue to provide a big contribution to growth. But this won’t be enough to offset the drag from the stronger [NZ] dollar,” he said.

“As such, we expect that overall GDP growth will slow from 3.6 per cent in the second quarter to below 3 per cent early next year.

“We also expect GDP growth in Australia to ease over the next year, but the relative performance of New Zealand probably won’t be good enough to push the kiwi dollar to parity against the Aussie dollar in the next year.”

Capital Economics is predicting two rates cuts from both the RBA and RBNZ over the next year, meaning an interest rate differential will not cause a marked shift in comparative currency valuations, while both are tipped to slide to around 65c against the US dollar next year given predictions of a more hawkish Fed.

“But there’s a good chance that the kiwi may not weaken as much as the Aussie because, as long as housing-activity holds up, the outlook in New Zealand beyond the next year is a bit better,” Mr Dales said.

The Australian dollar most recently traded at US75.1c, while the New Zealand dollar was seen at US73.1c.