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Currency World Cup: New Zealand dollar closes in on parity with the Aussie

Mark Mulligan
Updated

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Australians and New Zealanders have long-revelled in the competitive banter and friendly rivalry typical of siblings with a lot of common.

If it's not the Kiwis' domination of rugby or Australia's upper hand in cricket, trans-Tasman relations have often been defined by who's beating who on the sporting field, on the open seas, in music and the arts or in the world at large.

As Australia grapples with sinking commodity prices, sluggish consumer spending, lacklustre business investment and an unstable political environment, New Zealand can boast of almost boom-time conditions. Getty Images

And whatever the scoreboard says, Aussies often have to concede that when it comes to punching above one's weight, New Zealand, an island nation with a population of just over four million, more than holds its own against what its inhabitants some times refer to as "the Western Island".

And now, for the first time ever, the Kiwi dollar is challenging its Aussie counterpart in the value stakes.

'Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range,' says RBNZ governor Graeme Wheeler.  Brendon O'Hagan

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Divergent growth and interest rate trends between the two economies could bring on parity between their currencies for the first time since their respective flotations in the 1980s.

The trans-Tasman pair is currently trading at post-float lows, with the Aussie on Friday fetching $NZ1.01, down from year-to-date highs around $NZ1.07, an historic average above $NZ1.20, and all-time peaks above $NZ1.50.

Although perfect parity has so far been elusive, conditions are ideal for the Kiwi and Aussie to become one in value before too long.

As Australia grapples with sinking commodity prices, sluggish consumer spending, lack-lustre business investment, and an unstable political environment, New Zealand can boast of almost boom-time conditions, popular, sure-footed governance and the sort of confidence that most of the world has only been able to dream of since the global financial crisis.

"The longer-term structural factors that have been supporting the cross rates from the Kiwi side over the last year or two have really meant that the New Zealand economy at the moment is just outperforming Australia's," says HSBC's New Zealand economist Daniel Smith.

"Last year, the New Zealand economy grew by 3.3 per cent, while Australia grew at 2.7 per cent.

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"Of course, the Bank of New Zealand lifted its cash rate by 100 basis points last year, whereas the Reserve Bank of Australia is sill in the easing phase."

And nor is this divergence of fortunes likely to reverse any time soon.

The price of iron ore, Australia's largest single export, on Thursday hit a new six-low of $US49.54, further threatening resource company profits, government revenues and the nation's well-being. Business and consumer sentiment remains weak, and unemployment, at a 12-year high of 6.3 per cent, is likely to rise before it it improves.

By contrast, the unemployment rate in New Zealand is just over 5 per cent, while Chinese demand for the country's premium dairy products helped drive a bumper year for prices, volumes and demand.

In fact, so effective has been the 2008 landmark free trade agreement between New Zealand and China, that merchandise exports to the giant Asian powerhouse have surged from $NZ2 billion - about 5 per cent of the total - in 2007 to more than $NZ10 billion - or 21 per cent - now.

In the process, China had overtaken Australia as New Zealand's largest trade partner.

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"Australia in the past has benefited hugely from Chinese demand for hard commodities," says HSBC's Daniel Smith

"In future, I think the growth in demand for those hard commodities is not going to be as rapid as what we've seen over the decade or so.

"The growth in Asian demand is going to be shifting towards the softer commodities, such as high-quality food," he said.

"And New Zealand of course is ideally situated to benefit from that shift."

And here's the final point to cruel the Australian swagger when it comes to its trans-Tasman brethren: with jobs galore on offer, and a lower cost of living, New Zealand has not only stemmed the net outflow of its workers to Australia and beyond, but has succeeded in enticing them home.

And the government of John Key also wants Aussies to consider a Kiwi sojourn, promoting opportunities across the ditch in a series of job fairs around Australia at the end of last year.

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The reconstruction of Christchurch following the devastating 2011 earthquake partly explains a shortage of construction workers, engineers and tradespeople, as does heightened building activity in Auckland.

Government policies aimed at fostering high-tech industries have also opened vacancies for IT professionals, while economic buoyancy translates to demand for services such as healthcare and hospitality.

"Although employment has grown very strongly, essentially the supply of workers has meant that new demand is being met," said Mr Smith.

This has kept wage growth and inflation in check, encouraging businesses to keep investing as Australians continue to hold back.

HSBC's official view is that the Kiwi dollar will hang around its current levels against the Aussie for the foreseeable future. However, with currencies around the world being tossed about in a sea of volatility, a one-for-one exchange looks likely at some stage.

"I think there's every chance that we could see a temporary visit to parity or slightly beyond," said Mr Smith.

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