Australia and New Zealand are neighboring countries with highly intertwined economies and cultures. Australia, which has a larger and more industrialized economy, utilizes the Australian dollar (AUD), while New Zealand with an advanced market economy utilizes the New Zealand dollar (NZD), informally known as Kiwi. The two countries maintain a free trade agreement. Australia is New Zealand’s second-largest trading partner behind China, with 26.2b NZD. Both countries have a floating exchange rate. The current exchange rate for AUD/NZD as of April 21, 2022, is 1.0954 (Bloomberg, 2022).
The biggest ongoing macro factor is the geopolitical crisis in Ukraine. Both countries have sanctioned Russia but do not maintain strong trade relationships with it, and receive less than 2% of oil and other energy from Russia, meaning that neither economy would be drastically affected directly. The AUD is seeing some strength as it is viewed as one of the more reliable reserve currencies by investors in times of crisis. COVID-19 is still an ongoing issue, but both countries have opened borders to the vaccinated and maintain a ‘living with COVID’ approach. A significant impact may be brought by COVID-19 lockdowns in China, essentially freezing supply chains and trades on many fronts. China is the primary trading partner for Australia and New Zealand. However, the value of the two-way trade volume for New Zealand is 31.5b NZD, while for Australia, it is 180b AUD, an 84% difference (New Zealand Foreign Affairs and Trade, 2021).
If the lockdown in China persists and it will negatively impact Chinese growth and commodity price demand, then the AUD will be affected slightly. However, the Ukraine crisis is generally driving commodities up, and as Australia is a major oil producer and exporter, this should aid the currency. At the same time, New Zealand largely exports agricultural commodities and has to import oil, fuel, and other commodities which are rising in value, which may put downward pressure on the currency.
Global inflation, as part of the ongoing crises described above, is steadily rising. Australia and New Zealand have not been immune. The Reserve Bank of Australia (RBA) saw core inflation rising higher than the target 2-3% range in the first quarter of 2022, lifting the annual rate to at least 3.2%. The RBA has maintained an emergency low-interest rate of 0.1% and has seen no official hikes since 2010, but expert and market expectations are that the RBA will hike the rate to 0.25% in June, and potentially 2% by year-end (Cole, 2022). Meanwhile, New Zealand has seen a 30-year record inflation peak at 8.5%, once again above the 3% target range. Recently, the Reserve Bank of New Zealand (RBNZ) has raised the interest rate to 1.5%, with two-year swap rates that reflect interest rate expectations suggesting a hike to at least 3.53% (Lefort, 2022).
Generally, a country with a consistently lower inflation rate demonstrates an appreciating currency value as its purchasing power increases. New Zealand’s inflation rate is significantly higher, depreciating its currency. While both countries are increasing interest rates that are meant to boost currency value, because of New Zealand’s inflation rate, that hike will be largely offset. It is unclear how much each currency will be impacted as a result of interest rate hikes, but it is expected that AUD will likely benefit more. Furthermore, across international markets and currency exchanges, the AUD is outperforming the NZD, particularly in USD. Furthermore, the Australian markets are pricing in the RBA likely rate hike this summer, both betting and pressuring that the government will change its conservative monetary policy stance. Meanwhile, the NZ economic outlook is deteriorating, and there is a lack of faith in the business community in the NZ government to enact competent economic policies to reduce inflation and improve conditions. Given all these factors, in 2022, the AUD will appreciate against the NZD. The rate will likely continue climbing stably, reaching 1.13 at mid-summer and potentially 1.5 by end-of-year.
Reference List
Bloomberg AUDNZD: CUR, 2022.
Cole, W. Australia rate hike brought nearer by inflation, wages – central bank, Reuters.
Lefort, C. NZ inflation hits 30-year peak but disappoints rate hawks, Financial Review.
New Zealand Foreign Affairs and Trade Market update: China, 2021, New Zealand.