Oz economy puts pressure on NZ dollar

Australia's economy is being boosted by a strong commodities market. Photo / AAP

A stronger Australian economy and election uncertainty in New Zealand is tipped to keep pressure on the Kiwi dollar, which last week hit a 15-month low against the Aussie.

The New Zealand dollar was trading at A90.08c yesterday, having fallen as low as A89.76c on Friday - the lowest since April last year.

Westpac senior market strategist Imre Speizer said several factors were contributing to the fall, not least the strength of the Australian economy, boosted by a strong commodities market.

Chinese demand for iron ore had fallen less than previously expected, which had helped maintain the market.

"Commodities in Australia are outperforming ours. It's the whole commodity basket but if you look at iron ore relative to dairy - iron ore has been rising a lot and dairy has been going sideways," Speizer said.

Economic data out of Australia had been strong in the last week, with the country's Q2 GDP figures due out tomorrow, which Speizer said were expected to be reasonably strong.

The interest rate spread had been moving in Australia's favour. New Zealand rates were higher, however this advantage had been diminishing Speizer said, with the Reserve Bank reiterating that the official cash rate was on hold, and indications this could be until early 2020.

Election uncertainty in New Zealand had started to have an impact on the market, with the latest Newshub Reid Research poll over the weekend showing support for National at 43.3 per cent, the lowest in a decade in that poll, while Labour climbed 6.3 points to 39.4 per cent.

"If there is one thing we can take from the US dollar's performance over 2017, it is that currency markets don't like policy (and economic) uncertainty," said Cameron Bagrie, chief economist at ANZ Bank New Zealand.

"It's the New Zealand dollar's turn to suffer, with the local election looking like a nail-biter."

Following recent polls and in particular one last week showing Labour overtaking National, the market had started to take notice, Speizer said.

"Now there is election uncertainty and we could get a change of government which introduces a whole lot of uncertain themes," he said.

"Uncertainty is always a negative for markets and so they're selling the kiwi as a result.

"It does look like it could slip a bit further from here - we run a range of fair value models on this and they all say it should be around A89c so we expect it may be around that for the rest of the year."

Kiwibank chief economist Zoe Wallis said global events, including North Korea's missile testing, would continue to hold some sway.

However, in comparison to the pressure facing the New Zealand dollar against the Aussie, businesses had raised their outlook against the US greenback.

The ASB Kiwi Dollar Barometer showed businesses expected the dollar to average US75c over the next year - 10c above the 12-month outlook from the previous survey three months ago.

ASB chief economist Nick Tuffley said the "stronger for longer" view in the Barometer marks a shift from the last few surveys, when businesses had been expecting the kiwi to depreciate against the US dollar.

Tuffley said: "Our view is that prospective additional US fiscal stimulus will be a long way off, with supportive domestic factors, including the elevated terms of trade and prospective official cash rate hikes, likely to support the New Zealand dollar."