Aussie Forecast to Fall to Parity with the New Zealand Dollar

But will the Reserve Bank of New Zealand initiate a fightback to defend the NZD?

Chatter of a looming 1:1 exchange rate between Australia and New Zealand has picked up over recent weeks.

The talk comes as the Australian to New Zealand dollar trades a steady path lower.

The AUD/NZD pairing peaked at 1.0798 in 2015, we have are now witnessing 1.0108; it would seem the bears are determined on taking the exchange rate to equality.

I point to this determination citing as an example the market’s decision to ignore April's Trade Balance data which came in essentially as expected at -1.26B versus -1.28B eyed.

It would seem the justification for the selling is an impending interest rate cut at the RBA.

“A rate cut by the RBA would no doubt push the pair to test of parity as the interest rate differential between New Zealand and Australia would continue to widen,” says analyst Boris Schlossberg at BK Asset Management.

Schlossberg says that such a move would cause problems on both sides of the Tasman sea but most particularly in New Zealand which is already facing lower demand due to a fall in milk prices and may find that the appreciating kiwi could hamper growth for the rest of the country's exports.

The Reserve Bank of New Zealand (RBNZ) will meanwhile be acutely aware of the decline in the Australian to New Zealand dollar exchange rate.

At the very least we should expect Governor Wheeler to issue strong words and threaten action on the exchange rate as he has done in the past.

We should not be surprised if the RBNZ resorted to intervention if RBA cut rates next week in order to keep the AUD/NZD exchange rate from a freefall.

“Once speculative markets like FX begin to gather momentum price moves can be very volatile and could greatly exceed the fundamental drivers,” notes Schlossberg.

The problem is that fighting a currency’s appreciation is a difficult prospect and the NZ dollar genuinely looks like it is deserving of its high valuations.

Hence we have seen forecasts persistently warning that the NZD will likely remain firm in 2015.

It seems to us then the Australian currency needs to strengthen on its own terms.

The only problem is that there just doesn’t seem to be the necessary economic momentum in the domestic economy to warrant a strong AUD.

So we may see some strong moves higher in AUD-NZD in coming days as knee-jerk central bank  actions are taken.

However, the fundamental case for parity to be reached remains intact.