Monetary Conditions

New Zealand dollar hits record high against Australian

Friday April 10, 2015 Hugh Dixon

The New Zealand dollar hit A98.47c on the 31st March, setting a new record high against the Australian dollar and getting ever closer to reaching parity with the Australian dollar.  The New Zealand dollar has been increasing in strength against the Australian dollar over the last five months after hitting a low of A88.80c in early November 2014.

 

    berl 10 april

 

 Floating exchange rates such as New Zealand’s are very difficult beasts to predict and forecast, because they can be influenced by and potentially react unpredictably to a large variety of information.  In the current situation it is likely that the New Zealand and Australian dollars are reacting to the following information:

 

  • The price of iron ore, one of Australia’s key exports has dropped in recent days to a 10 year low.
  • The Reserve Bank of Australia’s (RBA) decision on 4th February 2015 to drop Australia’s official cash rate to 2.25 percent.
  • The expectation that the RBA will decide in early April 2015 to drop Australia’s official cash rate to 2.0 percent.
  • The Reserve Bank of New Zealand (RBNZ) has not dropped the OCR, making New Zealand’s one of the highest in the western world.

 

This evidence suggests that the reason the New Zealand dollar is at the current record highs against the Australian Dollar is not so much a recent increase in the New Zealand dollar, but more a growing weakness of the Australian dollar.  Given the recent weakness in the Australian economy and the recent strong growth in the New Zealand economy, the question becomes not if parity will occur, but when and for how long? 

 

 

Whenever there is a movement in a floating exchange rate, there are definite winners and losers.  In this case those that benefit from the rise in the value of the New Zealand dollar against the Australian dollar include:

 

  • Anyone importing Australian products or services.  Although the goods and services cost the same in Australian dollars; it now takes less New Zealand dollars to purchase the goods and services.
  • New Zealand tourists travelling to Australia, who are able to get more Australian dollars for the same amount of New Zealand dollars.

 

While those that the rise in the New Zealand dollar against the Australian dollar will negatively impact include:  

   

  • New Zealand exporters to Australia, because  they now get less New Zealand dollars for any sales taking place in Australian Dollars.
  • Australian tourists, who as New Zealand’s largest tourist market will face getting less New Zealand dollars for expenditure in New Zealand, and may delay travel as costs in Australian dollars rise.