Financial weakness restrains kiwi vs Australian dollar

NZ financial weakness sees kiwi dollar lag trans-Tasman neighbour: Westpac

By Paul McBeth

Dec. 15 (BusinessDesk) – New Zealand’s historically poor savings record and reliance on offshore funding has helped push the kiwi dollar down to decade-lows against its Australian counterpart, according to Westpac Banking Corp. research.

Chief economist Brenan O’Donovan and senior economist Dominick Stephens say the country’s lack of local funding means it’s more vulnerable to problems in the global financial system, and the crisis of the past two years has meant the divergence between the two neighbours has become glaringly obvious.

“Elevated financial stress does tend to depress NZD/AUD and the effect is larger and longer-lasting than we originally anticipated,” O’Donovan and Stephens said in their report. “The degree of financial stress will remain a critical driver of the NZD/AUD going forward.”

This has led to the kiwi dollar touching a ten-year low at 75.13 Australian cents yesterday. Its next hurdle would be 73.24 cents, the level plumbed in 2000. At the same time, the kiwi has been climbing against the U.S. dollar with investors upbeat on the state of the two South Pacific nations. The kiwi recently traded at 75.21 Australian cents and 75.16 U.S. cents.

The widening gap between Australia and New Zealand has became more apparent last year when the larger nation dodged falling into recession and embarked on tightening monetary policy – the first G-20 nation to do so. New Zealand, on the other hand, slowly ground its way out of an economic contraction that started before the global financial crisis, and the local recovery has stalled as households are still reluctant to start spending gain.

The note comes amid gloomy news for New Zealand with yesterday’s government forecasts predicting another five years of cash deficits, for a cumulative shortfall of $44.4 billion, even as the Debt Management Office raises $31.8 billion over the same period. How the government manages its affairs is high on Standard & Poor’s watch list for New Zealand, after the rating agency put the nation’s AA+/A-1+ foreign currency rating on a negative outlook, giving it a one-in-three chance of being cut over the next two years.

Still, the Westpac economists are expecting the kiwi will post some gains against the Australian dollar over the coming two years, with the Reserve Bank of New Zealand likely to hike interest rates while the Reserve Bank of Australia eases off the brakes. New Zealand’s central bank had a false start in June when Governor Alan Bollard lifted the official cash rate 50 basis points over two meetings, something he’s had to stop with the local recovery struggling to take hold.

The market expects the RBNZ to boost the OCR 64 basis points over the coming 12 months, according to the Overnight Index Swap curve, and is betting the RBA will hike the target cash rate 43 points.

(BusinessDesk)

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