Aussie-Kiwi Parity Bets Emerge as Rates Split: Australia CreditKristine Aquino and Candice Zachariahs
Currency traders are starting to price in a greater chance of the Australian dollar plunging to parity against its New Zealand counterpart for the first time as interest rates diverge in the two nations.
The Aussie was at NZ$1.1006 as of 12:04 a.m. in Sydney after earlier falling to a five-year low of NZ$1.0994, extending its decline in 2013 to 12 percent, the most in 11 years. There’s an 17 percent chance it will fall to NZ$1 by the last quarter of 2014, up from 5.6 percent as of Nov. 4, options data compiled by Bloomberg show. Australia’s two-year swap rate, used to lock in borrowing costs, is the lowest relative to New Zealand’s since 2008.
Australia’s economy is slowing as mining investment wanes and prices moderate for iron ore exports, while New Zealand’s is accelerating on rising dairy prices and a post-earthquake housing boom. Traders are paring wagers for the Reserve Bank of Australia to raise its key rate after Governor Glenn Stevens’ reiterated a lower Aussie is needed to spur the economy. They are betting the Reserve Bank of New Zealand will increase its benchmark by the most among developed nations over 2014.
“Every man and his dog is short Aussie-kiwi at the moment,” said Chris Weston, chief market strategist at brokerage IG Ltd. in Melbourne. “The RBA is going to keep rates on hold for quite some time while the RBNZ may look to raise rates at least 50 basis points next year. Getting down to parity is clearly not insurmountable in 2014.”
The Aussie’s decline versus New Zealand’s kiwi dollar this year is second only to the Japanese yen among Group of 10 currencies tracked by Bloomberg. It has fallen 13 percent in 2013 to 90.40 U.S. cents.
The Aussie dropped as low as NZ$1.0285 in 1997, its weakest level against the kiwi since that currency was allowed to trade freely in March 1985.
Australia’s two-year swap rate was at 2.91 percent, offering 0.86 percentage point less than its New Zealand counterpart, the biggest discount in five years. The bigger nation’s three-year government bond yield was at 3.12 percent, while the 10-year yield traded at 4.39 percent.
Even after 2.25 percentage points of RBA rate reductions since the beginning of November 2011, Australia’s expansion slowed to 2.3 percent in the three months through September from a year earlier, government data showed yesterday. That’s the third-straight quarter of gross domestic product readings below 2.5 percent.
A report today showed the nation’s trade deficit widened more than economists expected in October, while figures released in the past month showed full-time jobs fell by the most in more than a year, business confidence declined and building approvals fell.
“The economy is not exactly rolling along,” said Darren Langer, Sydney-based head of portfolio management at Tyndall Investment Management Ltd., which oversaw A$23 billion of assets as of Sept. 30. “The RBA is probably on hold for quite some time, with the risk that they may have to cut again, rather than worrying about rates going up anytime soon.”
A lower Aussie “is likely to be needed to achieve balanced growth in the economy,” Stevens said on Dec. 3 after he and his board left the cash rate at 2.5 percent. Traders who in November saw the RBA raising its benchmark by as much as 22 basis points over the next year have now scaled back expected increases to 15 basis points as of today, according to Credit Suisse Group AG indexes.
RBNZ Governor Graeme Wheeler will probably increase his nation’s key rate by 1.04 percentage points over the next 12 months, the most among 10 major central banks tracked by Credit Suisse.
“There’s a relative interest rate argument that I don’t think is completely priced in and the relative terms of trade are continuing to move in favor of New Zealand dollar outperformance,” said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “I think NZ$1.05 is certainly plausible over the course of next year, though our current forecast is for it to reach NZ$1.10.”
Australia & New Zealand Banking Group Ltd. said last week its gauge of business sentiment in the smaller South Pacific nation climbed to a 15-year high in November. New Zealand’s export prices relative to import prices climbed last quarter to the highest since 1973, led by a surge in dairy prices, the statistics bureau said Dec. 2. Consumer prices climbed in the three months to Sept. 30 at the fastest pace in more than two years, government figures showed in October.
Australian growth will probably slow to 2.5 percent this year before quickening to 2.7 percent in 2014, according to the median estimate of economists surveyed by Bloomberg. New Zealand’s economy will expand 2.7 percent in 2013 and 3 percent the following year, a separate poll showed.
Standard Chartered Plc predicts the RBA will lower the cash rate by another 25 basis points to 2.25 percent by March, while forecasting a 75 basis-point increase in the RBNZ benchmark to 3.25 percent in 2014. The lender sees the Aussie falling to NZ$1.04 by the middle of next year, according to Divya Devesh, a Singapore-based foreign-exchange analyst.
“The domestic story in New Zealand is much better than Australia’s,” Devesh said. “While we are looking at the RBNZ to hike, we expect the RBA to cut. That policy difference expectation is clearly playing through the cross.”