Australia’s dollar has taken over as the developed world’s best-performing currency this month, passing New Zealand’s, as traders’ expectations for monetary policy in the two neighbors converge.
The Aussie rose 2.4 percent since June 30 to NZ$1.1026 as of 1:37 p.m. in Sydney, poised for the best monthly performance since August. It has climbed 5.2 percent versus the U.S. dollar this year compared with the kiwi’s 3.6 percent advance. The gap between policy expectations from the Reserve Bank of Australia and New Zealand’s central bank was at the narrowest in 14 months on July 28, Credit Suisse Group indexes show.
Australian inflation that climbed last quarter toward the top end of the RBA’s target band spurred traders to nearly erase bets on an interest-rate cut by the central bank over 12 months. New Zealand’s policy makers signaled a pause in increases after raising the key rate four times this year, taking the kiwi to this year’s low versus the Aussie on Tuesday.
“The Aussie dollar is well under-priced for RBA tightening and the kiwi dollar is now on hiatus,” Annette Beacher, the Singapore-based head of Asia-Pacific research at TD Securities, said by phone on Tuesday. “The risk is now the RBNZ is pausing for longer and the RBA isn’t as dovish as everyone expects it to be.” TD predicts the Aussie will climb to NZ$1.13 by year end, though it may reach that level sooner, Beacher said.
RBA governor Glenn Stevens said on July 22 he’s content with current policy settings and stands ready to do more if needed. A report the following day showed a measure of core consumer prices rose an annual 2.9 percent in the second quarter, the fastest pace in four years and near the top of the central bank’s 2 percent to 3 percent target for average annual inflation.
His New Zealand counterpart Graeme Wheeler said on July 24 it was prudent to have a period of assessment on the impact of higher rates before a further adjustment, following a decision to raise borrowing costs by 25 basis points.
A Credit Suisse gauge shows traders see the RBA lowering its 2.5 percent benchmark four basis point in the next 12 months, from a projected decrease of 15 basis points on July 18.
The RBNZ, which has already increased its key rate by 100 basis points this year to 3.5 percent, is expected to lift its benchmark by a further 40 basis points over the coming year, a separate index shows. That compares with a reading of as much as 92 basis points on July 8, before Wheeler’s most recent quarter- point increase.
The gap between Australia’s two-year swap rate and the comparable New Zealand measure narrowed to a six-week low of 1.34 percentage points on Tuesday.
HSBC Holdings predicts the Aussie will fall to NZ$1 amid an eventual widening of Australia and New Zealand’s interest-rate gap. Traders will be looking for opportunities to sell the Aussie versus the kiwi “once it becomes clear that the RBNZ’s rate hike story is very much intact,” Paul Mackel, HSBC’s Hong Kong-based head of Asian currency research, said by phone on July 28.
The median of more than 40 analyst estimates based on cross rates puts the Aussie at NZ$1.08 by Dec. 31. Commonwealth Bank of Australia on Tuesday maintained its year-end forecast of NZ$1.1149 and recommended investors buy the Australian dollar on dips versus the kiwi.
The Aussie recovered further ground against the kiwi on Tuesday, climbing to this year’s high, after Auckland-based Fonterra Cooperative Group cut its forecast payment to New Zealand farmers as increasing global milk production and a build-up of inventory in China damps prices. Fonterra is the world’s largest dairy exporter.
Morgan Stanley predicts the Aussie will climb to NZ$1.18 by year end, the most bullish among companies surveyed by Bloomberg, as investors are lured to Australia, which has a sovereign debt market nearly five times the size of New Zealand’s.
Gains in Australian government bonds are outpacing those for New Zealand this year. The larger nation’s securities have returned 5.4 percent, compared with 3.8 percent for notes issued by its smaller neighbor, according to Bank of America Merrill Lynch indexes.
Support for Australian bonds from overseas investors “will continue, and that will be enough to continue to drive Aussie higher,” Geoff Kendrick, Morgan Stanley’s Hong Kong-based head of Asian currency and interest-rate strategy, said by phone on Tuesday.