Net migration to New Zealand hit a four-year high last month – and the country’s currency has climbed with it. A relatively buoyant economy has both slowed the stream of young kiwis crossing the Tasman Sea to work and propelled the New Zealand dollar to a five-year high against its Australian counterpart.
In the year to date, the kiwi has climbed 10 per cent against the Australian dollar, while in the past three months it has gained more than 6.3 per cent to $0.8264 against the US dollar, the strongest performance in the G10 group of liquid, rich country currencies. The Australian dollar’s rise of less than 1 per cent to $0.9381 against the dollar over that period makes it the weakest G10 currency after the Japanese yen.
The divergence is striking because the Antipodean currencies – favoured by hedge fund investors for their high returns and because they are viewed as a proxy for the Chinese economy – had been fairly stable against one another for several years. They strengthened in tandem in 2009 on the flood of global liquidity, with the kiwi fluctuating from about A$0.73 to A$0.83 to the Australian dollar.
Now, their relative fortunes illustrate two of the big themes driving global currency markets: the effect China’s economic rebalancing is having on its main trading partners, and the degree to which FX investors are trading on macroeconomic trends – with a less indiscriminate appetite for risk – as the US Federal Reserve weighs the case for scaling back its stimulus.
Both countries are heavily exposed to a slowdown in the Chinese economy: Australia’s trade with China represented about 5 per cent of gross domestic product in April 2013, while for New Zealand it accounted for 3.5 per cent of economic output.
But while Australia’s manifold economic woes are compounded by concerns over Chinese demand for raw materials – analysts at Citi think it will be the hardest hit in the G10 by the decline they forecast in iron ore prices – New Zealand’s agricultural exporters are affected more by trends in Chinese consumption, in particular by the rush to buy supplies of foreign infant formula brands. Fonterra, the dairy producer, this week issued a forecast for stronger milk prices that could boost dairy revenues 50 per cent this season – a rise equivalent to roughly 2.5 per cent of GDP.
Adarsh Sinha, strategist at Bank of America Merrill Lynch, argues that “China’s rebalancing away from investment towards consumption will be more positive for New Zealand than Australia”, and says the relative trend for New Zealand to have higher interest rates and commodity prices will therefore continue.
Also fuelling New Zealand’s growth is strong consumption and a construction boom, centred on repairing the damage of the 2011 Christchurch earthquake. The central bank signalled this month that increases in interest rates “will likely be required next year”. Like Australia’s central bank, it would like to see the currency weaken. But while investors think weak Australian growth may allow scope for further rate cuts next year, Mr Sinha said an explicitly hawkish policy stance will make it difficult “to credibly talk down the NZD”.
“In the past couple of weeks the markets have perhaps woken up to the fact that New Zealand’s central bank may be the first [in the G10] to hike rates,” says Jane Foley, strategist at Rabobank.
Investors took this month’s reprieve from Fed tapering as an opportunity to pile into the kiwi, according to Citi data showing a rise in positioning “far more pronounced than that for the blocs of emerging markets currencies”. But the currency took a knock this week after a profit warning from Fonterra and data showing a widening in the trade deficit. The question now is how far its strength will be sustained.
“The market is probably pricing in too much,” says Ian Stannard, strategist at Morgan Stanley, arguing that the central bank “may have to keep rates lower for longer” if measures designed to deflate a housing bubble end up hitting consumer demand.
But BNP Paribas called this week’s slip a buying opportunity and Mr Sinha argues there is “limited evidence that New Zealand dollar positioning or valuation is stretched”, even if cyclical and commodity price outperformance has now been priced in.