New Zealand Dollar's Retreats From Parity with Australia's

By Lucy Craymer 

        WELLINGTON, New Zealand--In sports lately, New Zealand can't seem to get the last big win.
        In 2013, the country's sailors had an 8-1 lead in the America's Cup, before losing to the Americans in one of sport's greatest comebacks--or collapses, depending on one's perspective. In March, New Zealand reached the Cricket World Cup final for the first time, only to be thrashed by Australia.
        Now, Kiwis are suffering in the currency market. Just two weeks ago, the New Zealand dollar was within a penny of reaching parity with the Australian dollar, a point of pride for the smaller nation. But even as the Australian economy weakens, the so-called Aussie has rallied, leaving its New Zealand rival behind.
        A strong currency can hurt a country's exports, corporate profits and growth, but when it's the kiwi versus the Aussie, national pride trumps macroeconomics.
        "Parity with Australia is seen by many New Zealanders as something to be proud about, and to beat our chest about and say, 'Aren't we good?'" said Don Brash, who was governor of the Reserve Bank of New Zealand the last time the kiwi flirted with parity, in 1995.
        Much as Canada faces ribbing from the U.S., New Zealand has long been the butt of jokes from its larger neighbor across the "ditch"--as the stretch of Tasman Sea that separates the two Pacific countries is known colloquially.
        But after more than four decades in Australia's shadow, the kiwi--already the world's 10th-most-traded currency--is benefiting from what some economists are describing as New Zealand's "rock-star economy, " just as tumbling global commodity prices mean resource-rich Australia's fortunes are on the wane.
        New Zealand's economy grew by 3.5% from a year earlier in the fourth quarter of 2014, despite recently waning dairy prices. Australia grew by a below-average 2.5% over the same period. Unemployment in New Zealand is currently at 5.8%, compared with 6.1% in Australia.
        Although New Zealand's businesses are already struggling with the strong currency, crossing parity with the Aussie was seen as a much-needed boost after the World Cup loss.
        On April 6, the kiwi hit a 37-year high of 99.78 Australian cents as the prices of commodities such as iron ore and coal, Australia's biggest exports, fell sharply. At the time, markets were anticipating at least two interest-rate cuts in Australia this year, while in New Zealand rates were expected to be on hold for the foreseeable future.
        The Reserve Bank of Australia delivered a 0.25-percentage-point cut Tuesday, taking the cash rate to a record-low 2%. But the Australian dollar bounced as the market interpreted the surprisingly upbeat message in the accompanying statement as a sign this was the last in the current series of cuts, which dates to 2011. Meanwhile, the Reserve Bank of New Zealand last week kept interest rates at 3.5%, but signaled a willingness to cut if necessary--a signal many economists interpreted as a shift toward an easing bias. Gov. Graeme Wheeler pointed to lower world dairy prices and the high exchange rate as among the factors weighing on the agriculture-focused country's economic growth.
        The Australian and New Zealand dollars are both used by traders to make bets on economic growth because they tend to track volatile commodity prices, and frequently move together. Interest rates globally remain low, increasing the appeal to foreign investors of both countries' relatively high-yielding bonds and other assets, sold in the local currency.
        On Tuesday in Sydney the Australian dollar bought NZ$1.0636. In March 2011--at the peak of a decadelong mining boom--the Australian currency touched its recent high against the kiwi: NZ$1.355. The kiwi is named for the flightless native bird depicted on the dollar coin.
        Although the failed attempt at parity may be another hit to New Zealanders' national pride, a weaker kiwi is good news for local tourist destinations and exporters of products from wine and dairy products to kiwifruit. Australia is agriculture-rich New Zealand's second-largest trading partner, after China.
        Vintner George Fistonich said parity would be especially difficult in an industry like winemaking, where margins are already slim. "Getting up to 89 Australian cents to 90 cents we could cope with, but getting up to parity makes it quite difficult to deal with," said the industry veteran, who founded the family-run winery Villa Maria Estate in 1961. "It doesn't make it very profitable."
        Australia buys around 30% of New Zealand's annual wine exports by value.
        The New Zealand manufacturing sector had warned that parity was no party. "While businesses can hold on for a time under difficult conditions as an overvalued and volatile exchange rate eats away at margins, this can't go on forever--deferred investment from low returns damages future competitiveness, innovation, employment and their ability to operate successfully from New Zealand," said John Walley, chief executive of the New Zealand Manufacturers and Exporters Association.
        Parity between currencies is a largely symbolic milestone. Australia's currency traded above parity with the U.S. dollar for close to three years--between 2010 and 2013--as commodity prices soared while the U.S. was still struggling to recover from the global financial crisis. The strong Aussie hurt manufacturers, tourism operators and retailers, and has been blamed for hollowing out the economy, making it harder to recover from the decline in commodities prices.
        Still, when Canada's loonie hit parity with the U.S. dollar in 2007, America's rival to the north puffed out its chest and grinned--even though it made it harder for businesses ranging from night clubs to hotel operators to do cross-border trade.
        Australia's Treasurer Joe Hockey on Tuesday heaped rare praise on New Zealand for its falling unemployment, rising living standards and a budget coming into surplus, while Australia was "still operating on the presumption of a never-ending mining boom." The remarks were published in a newspaper column alongside a cartoon of the treasurer dressed in the uniform of New Zealand's winning All Blacks rugby team.
        Write to Lucy Craymer at Lucy.Craymer@wsj.com
        (END) Dow Jones Newswires

        May 06, 2015 02:15 ET (06:15 GMT)

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