HSBC sees Kiwi dollar challenging parity with the Aussie dollar by year's end

HSBC has reiterated its call that the New Zealand dollar could reach parity with the Australian dollar by the end of the year.

In a currency report entitled AUD-NZD: book your parity party, but not yet, the bank's strategists suggest parity is very much on the cards.

"Since early 2011, AUD-NZD has fallen about 20% and for much of this year has been trading close to the lowest levels seen since the currencies were both floated in the 1980s. The fall in the cross rate reflects a combination of the AUD giving back ground and the NZD continuing to trend higher. The recent jump in AUD-NZD following the Reserve Bank of New Zealand meeting is not consistent with the fundamentals and we expect the fall to resume," HSBC says.

"The main reason for the sustained fall in the cross has been the shift in relative interest rate expectations. While the Reserve Bank of Australia has been on hold since its last rate cut in August 2013, the RBNZ has raised rates by a total of 100 basis points since the beginning of this year. For the next few months, both sets of policymakers are likely to keep rates on hold, and AUD-NZD may continue to tread water for now. Both central banks are trying to talk their respective currencies down."

Ultimately HSBC says it expects the Kiwi dollar to challenge parity with the Aussie by the end of the year. Three reasons are given for this view.

The first is relative growth prospects of which HSBC says; "The New Zealand economy continues to grow faster than long-term potential, whereas higher unemployment suggests Australia still has slack in the economy."

The second is relative commodity prices on which  HSBC says; "Slower growth in China has hit Australia’s commodity export prices much more than those in New Zealand. The Australian mining investment boom is fading, and the rebalancing of growth has been very slow."

And the third is relative valuation with HSBC saying; "Although both currencies remain ‘overvalued’ relative to PPP (purchasing power parity), and both central banks would like to see their currencies lower, AUD is about 10% more ‘overvalued’ than NZD."

"It may not yet be quite time to book your parity party, but you should at least be checking out venues," says HSBC.

Today's report comes after HSBC predicted at the beginning of the year that the Kiwi dollar would reach US87 cents by the end of 2014, and may "surpass" parity with the Australian dollar. Here's a video interview from February with HSBC's chief economist for Australia and New Zealand, Paul Bloxham, where he also talked about why the New Zealand economy would be "the rock star economy" of 2014.

Since the two currencies were floated in the 1980s, HSBC says the trading range has been A$1 to between NZ$1.05 to NZ$1.60, or between about A63 cents to A95c to NZ$1, with the Aussie dollar having averaged about NZ$1.21.

"The cross has been at or close to 1.05 on three occasions – July 1995, May 2005 and January 2014. The lows of 1995 and 2005 were both immediately followed by sharp rallies of 15% and 10%, respectively. Will the cross make new lows, or should we expect to see it head back towards 1.20 as it did on the previous two occasions? Following the recent RBNZ comments it may feel that way, but their actions will eventually overcome their words," HSBC says.

"While it is always dangerous to claim that ‘this time, it’s different’, we believe there are good reasons for expecting new lows in the cross, even if not in the immediate future."

The Kiwi was today at about A91.1c. You can download HSBC's full report here.