Kiwi and aussie regain investor favour
Take a look at a graph of the New Zealand dollar against the United States dollar and you might think you were staring at an Internet stock storming the heights in the new-economy mania days of early 2000.
The kiwi was at it again yesterday, hitting a fresh 40-month high of 53.48 US cents. It closed at 53.42, giving it a stunning gain of 36.24 per cent since a record low of 39.21 US cents on November 21, 2000.
To some degree the kiwi has been seen piggybacking on the strength of the Australian dollar, but it has actually outstripped its bigger brother in recent weeks.
The aussie yesterday reached a six-month high of 57.78 US cents, later closing at 57.71, a gain of 20.48 per cent since its record low of 47.9 US cents on April 2, 2000.
It is quite a turnaround for two currencies, which together with the euro, were referred to as the three 'cellar dwellers' of the global foreign exchange market just a couple of years ago.
JP Morgan regional currency strategist James Malcolm said: 'The big story of what is driving this is investors looking for yield. [Australasia] is where you want to park cash because you are getting a big yield pick up.'
The proactive, recession-busting United States Federal Reserve has axed interest rates, detracting from the attractiveness of holding US assets.
Central banks in Australia and New Zealand have not been quite as aggressive, particularly as their domestic economies have stayed strong, leading to worries of rising inflation. Last year, in fact, the Reserve Bank of New Zealand raised rates by 75 basis points.
The annualised interest rate on three-month deposits in Australia is 4.75 per cent and it is an even more attractive 5.75 per cent in New Zealand, according to Mr Malcolm. Those rates look attractive particularly when more exotic investment parking zones such as India are offering a rate of 5.85 per cent.
In terms of bond yields, UBS Warburg foreign exchange strategist Bhanu Baweja said there was a 130-basis-point pick-up on 10-year Australian government debt over US treasuries and 230 basis points for Wellington's debt.
That extra yield is a godsend to under-pressure institutions such as insurers which have to meet guaranteed returns to clients in an environment where stocks have performed miserably and US interest rates are at 40-year lows.
'Some people have commitments and they need that return on the bonds,' Mr Baweja said. 'People will continue to pile into these currencies.'
There are other reasons for the renaissance in Australasian currencies. With jitters about a US-led invasion of Iraq and nuclear tensions in the Korean peninsula, the two countries are seen as relative safe havens compared to the US and Europe.
They are also benefiting from the poor economic outlook for the traditional alternatives to the greenback - the Japanese yen and the euro.
While both Australia and New Zealand are expected to see some cooling off this year, their economies should still put in respectable growth.
UBS Warburg expects New Zealand's growth to slow to 3.2 per cent this year from last year's 4.4 per cent, while Credit Suisse First Boston sees Australian growth easing to 2.9 per cent from 3.8 per cent.
Then there is the commodity angle. Australia is rich in mineral resources and New Zealand in forestry products. Both countries are big exporters of foodstuffs. With commodity prices rising against the weakening dollar, the countries are enjoying higher incomes.
Barclays Capital chief regional economist Pieter van der Shaft said: 'The US is engaging in [loose] monetary policy. The value of paper money is declining relative to your assets and commodities are real assets.'
With gold and oil doing well, there is a natural tendency for investors to gravitate to currencies of resource-rich countries, although Mr Malcolm warned it was 'easy to overdo' that part of the story.
For New Zealand, some commentators are even talking about the 'Hobbit effect' - from the Lord of the Rings movies which feature the country's breathtaking landscapes - spurring inbound tourism.
On the debit side, both countries are presiding over widening current account deficits. The International Monetary Fund expects Australia's to widen to 3.9 per cent of gross domestic product this year, from 3.6 per cent last year. Meanwhile, New Zealand's deficit is seen growing to 4.1 per cent from 3.5 per cent. But that is still less than the gaping 5 per cent of GDP current-account deficit in the US.
For now, commentators are singing long and loud about the kiwi and aussie. JP Morgan is expecting the aussie to reach 60 US cents by June, 62 cents by September and 63 cents by year end. The house sees the kiwi edging up to 58 US cents by the end of the year.
Mr van der Shaft said: 'I think the strength will continue for a bit further. The aussie and kiwi are coming back from a period of undervaluation.'
The aussie was fairly valued at 61 US cents while the market was eyeing a near-term target of 55 US cents for the kiwi, he said.
JP Morgan said that with the aussie at a 30-year low on its cross against the kiwi 'the technical outlook firmly favours a rally in the cross from here', with the aussie outperforming the kiwi.
In the unlikely event that war fears fade, Mr Baweja said 'there will be a price to pay for the aussie and the kiwi' as investors rushed back into the greenback.