In March and April this year they were chilling the Lindauer from Cape Reinga to Invercargill, and all points in between.
New Zealand's resilient economy and pure food exports were pushing the Kiwi dollar so hard it looked as if for the first time in history it would hit parity with, and rise above, the Australian dollar. Then dairy prices fell, the RBNZ backed away from lifting interest rates, and the parity party was postponed.
Postponed, but not cancelled, as there is every probability that current macro trends will push the AUD/NZD cross rate back towards equality.
US Rates to Rise
The current bearishness around emerging markets, and by extension the Asia Pacific region, is largely due to the expected impact of a higher US dollar. The consistent lift in employment speaks to a major recovery in the North American economy. A much anticipated lift in US interest rates is due this year, and possibly as early as September.
The US Fed is clear that the "normalisation" of rates will be slow and gradual. One interpretation of the 25% rise in the US dollar index over the last year is that a first rate rise is "baked in". This could result in a "sell the fact" response to a rate rise. A falling USD would almost certainly see better sentiment towards emerging economies, and a re-thinking of the demand and international trade outlook.
Exports are a key influence on currency performance. The downdraft caused by a stronger US dollar and weakening emerging market economies dragged both industrial and agricultural commodities lower, and the Trans-Tasman dollars with them. A reversal of USD strength would not only have a direct positive impact on other currencies, but could also see a lift in commodity prices.
New Zealand's Commodity Advantage
Commodity price support may favour the NZD over the AUD, as NZ's agricultural tilt is favoured over Australia's mining bias. It's widely expected that the driver of growth in Asia will shift from industrialisation to rising consumer classes, increasing demand for higher quality foods.
These emerging factors may have halted the rise in AUD against the NZD:
AUD vs NZD - Weekly Chart
The weekly chart tells the story. In March, the pair came within 20 pips of 1.0000, turning with the RBNZ's interest rate stance. After hitting a high in early July above 1.1400, NZD strength is resuming, pushing the weekly highs and lows ever lower. A fall through 1.0900 would confirm to currency traders that the trend has reversed, and lead to expectations that AUD/NZD would once again test levels near parity.
Even the most astute economists and central bankers cannot predict the future. Markets can do anything, including the unexpected. However, any return of inflationary pressure or acceleration in growth rates in the Kiwi economy will add to NZD optimism, as the global drivers of exchange rates already appear to favour further falls in AUD/NZD, as the NZD strengthens.
Author:Michael McCarthy, Chief Market Strategist, CMC Markets