Weak Economy Weighing Down The Kiwi – Forbes Advisor Australia

The Australian (AUD) and New Zealand dollars (NZD) are two of the most-traded currencies in the global forex markets. 

The pair are correlated given the similar position of both countries as commodity exporters, and typically trade in a similar way against other global currencies. Both are also suited to “risk-on” trade, thanks to each country’s high exposure to commodities exports to China and a sensitivity to global growth.

Despite this, the AUD and NZD often display high levels of volatility against each other, offering lucrative opportunities for traders.

That variation has been evident over the last year, with the combination bouncing between 1.05 and 1.15 over that period. Despite a sharp rise in the last few weeks, the AUD/NZD pair is currently trading midway through the range.

The Australian Dollar’s Performance in 2023

The Australian dollar’s performance has largely been framed against a weakening global economy and central bank action in lifting rates.

The AUD has underperformed against most of its developed world peers as the Reserve Bank of Australia has lifted rates at an easier pace than other central banks, widening the differential in interest rates. It is down more than 2% against the US dollar so far this year.

Still, the gap has narrowed in recent weeks after the Australian central bank underlined its inflation-fighting mode by lifting rates by a quarter percentage point in June to an 11-year high of 4.1%, and warned that further tightening may be required.

Rising investor concerns about the risk to global growth have also played a role in the prolonged weak performance of the local currency, given the potential risk to Australia’s exports. However, global equities and other risk-assets have staged a recovery in recent months, allowing the AUD to make up some ground.

How Has The NZD Been Performing?

The New Zealand dollar has been among the weakest performing major currencies in 2023, with the persistent downtrend attributable to several key factors.

An immediate reason has been the New Zealand’s central bank unexpectedly signaling last month that no further policy tightening will be needed to tame inflation, after it lifted the cash rate to a steep 5.5%.

Disparities in interest rates play a pivotal role in currency valuation and the RBNZ’s decision to halt its rate hike trajectory, while other central banks continue their tightening cycles, has eroded the interest rate advantage previously enjoyed by the Kiwi, says Luca Santos, currency analyst at ACY Securities.

“If you’re an investor seeking a higher yield, you know that NZ has the higher rate among the G10 now, but you know as well that they won’t raise rates anymore, while other central banks are being hawkish and keep hiking. So it’s much more advantageous to park your money in other countries.”

A heightened perception of risks associated with the New Zealand economy is also affecting the currency’s strength. The economy shrank 0.6% in the final three months of 2022 and economists are projecting another contraction in the first quarter of this year, amid high inflation, slowing consumer spending and a weaker property market. 

Meanwhile, global trade tensions, geopolitical uncertainties, and fluctuations in commodity prices are also taking a toll on the Kiwi’s value, given New Zealand’s heavy reliance on agricultural exports. In the first three months of 2023, import volumes surged the most in two years, adding to signs the economy may already be in a recession.

AUD to NZD Exchange Rate

At the time of writing, one Australian dollar buys 1.10 New Zealand dollars. 

The AUD/NZD rate hit 1.058—its lowest level this year—on May 23. Just a day later, the surprise RBNZ announcement that it was done with rate hikes completely reversed the momentum. That trend was underscored after the RBA, by contrast, lifted its cash rate in Australia on June 6.

“The aggressive interest rate moves by the RBA has pushed the AUD higher against its kiwi counterpart,” said Tim Waterer, chief market analyst at forex broker, KCM Trade.

“The RBA and the RBNZ are at different trajectories when it comes to the path of interest rates. Therefore, the current yield differential between the AUD and NZD looks set to shrink, which would be to the detriment of the kiwi dollar.”

Australian Dollar to NZD: Six-Month Forecast

In the short term, analysts expect the AUD/NZD rate to rise to 1.12, largely because the RBA’s hawkish-for-longer stance will boost the appeal of the Australian dollar.

ACY’s Lucas says from a technical perspective, the pair’s 200-day moving average currently ranges from 1.0885 to 1.1020/30. If these levels are successfully broken and retested, it is reasonable to anticipate AUD/NZD could rise to 1.12 within the next six months or less.

However, he is quick to add that merely focusing on the rate hike narrative is insufficient.

“It is imperative to recognize that the dynamics at play extend beyond rate hikes or pauses. The resurgence of the New Zealand dollar is contingent upon the recovery of export activities and a rebound in commodity prices.”

Another factor to consider in the short term would be the likelihood of a recession in New Zealand. A deteriorating domestic economy could prompt global investors to seek more stable assets, leading to a weaker Kiwi dollar. Recessionary conditions could also prompt the RBNZ to bring forward its timeline for cutting rates, making the currency less attractive to foreign investors.

AUD to NZD Long-Term Forecast

One key factor determining the AUD/NZD rate over a longer term will be the inevitable end to central bank tightening globally.

“Longer term, other central banks including the RBA will need to call a halt to the rate hiking cycle, similar to where the RBNZ is now. This would help the NZD to appreciate against other currencies on narrowing yield outlooks,” said KCM’s Waterer. 

This could see the AUD/NZD rate move back down to the 1.0550-1.07 range. 

Another important factor would be an improvement in trade and economic conditions. While Australia is currently experiencing favourable conditions for its minerals-heavy export basket, New Zealand’s agri-focused export performance has not been as good because of lacklustre conditions in the Chinese market. But that could change over the next year, boosting the attractiveness of the Kiwi dollar.