The Australian and New Zealand dollars have not exactly kept in step with each other in the last three months but the AUD/NZD exchange rate today is exactly where it was in late February and mid-April.
Both currencies have appreciated against the pound by about 5.5% over the period. Sterling has fallen by a net nine cents against the Australian dollar and given up ten cents to the NZ dollar. In early May the Australian dollar achieved a record high against, among others, the US dollar and the pound.
There are two reasons behind the Australian dollar’s strength. First is the high demand for Australia’s commodity exports and their rising prices. Even though in North America and most of Europe economies are struggling to regain momentum after the recession, Southeast Asia is doing fine. China is a major buyer of Australia’s biggest export, coal.
At the same time, investors find it hard to resist the lure of the Australian dollar’s high interest rates. With central bank benchmarks in the United States, Euroland and Britain at 0.125%, 0.5% and 1.25% Australia’s 4.75% looks almost irresistible.
It is less easy to justify the strength of the NZ dollar on a global level, at least as far as interest rates are concerned. The Reserve Bank did indeed begin to take rates higher in June last year but its last move was a cut from 3% to 2.5% in March after the Christchurch earthquake. Nevertheless, there is more than enough demand for New Zealand’s exports, principally dairy products and meat. The biggest customer is Australia, which takes a fifth of all NZ exports.
Britain, meanwhile, is a net importer and its 0.5% Bank Rate comes nowhere near the 4.5% annual inflation rate that eats away at the value of the pound. It was that low interest rate that provoked the sell-off that accounted for most of sterling’s losses over the last three months. In late March investors at last realised that the Bank of England had no intention of reacting to an above-target rate of inflation by raising the Bank Rate.
That low interest rate will continue to weigh on the pound, perhaps for another six months, and continued demand for food and minerals will keep the AUD and NZD solid. The risk to that scenario is investor confidence. If Greece’s government defaults on its debt or the Western economic recovery falters or overheated commodity prices suffer a correction the AUD and NZD will be two of the first to take a hit.
Thanks to the good folks at Moneycorp who helped contribute towards this article.