HiFX's Dan Bell says Kiwi-Aussie dollar parity still on the cards, any delay to expected Fed rate hike will boost NZ dollar

By Gareth Vaughan

The New Zealand dollar's run at parity with its Australian counterpart may have fallen short this week, but those who were planning a parity party should keep the champagne on ice, according to Dan Bell, director of sales at HiFX.

In our monthly never a dull moment currencies report Bell also points out that, with the potential for the first US Federal Reserve interest rate hike in nine years to be later than anticipated, the NZ dollar, backed by our 3.50% Official Cash Rate (OCR), is set for continued strength.

The Reserve Bank of Australia (RBA) largely surprised financial markets late on Tuesday afternoon by leaving Australia's cash rate at 2.25% rather than cutting it to 2%. This saw the Kiwi drop below AU99 cents.

Nonetheless Bell says parity remains on the cards, possibly before or around the next RBA cash rate review on May 5.

"If you look at what's happening in the Australian economy compared to New Zealand, Australia has this headwind from a huge drop in the resources and mining sector and we know that they had this massive boom. We're seeing huge weakness in iron ore prices and a lot of the other export commodities that Australia produces, and the RBA is really trying to prepare the Australian economy for this structural change. So they want a weaker Australian dollar, they want to encourage other export industries to pick up from where the resources and mining sector has left off," Bell says.

"So in between now and then there's still potential for the New Zealand dollar to push up to the parity level," adds Bell.

'Investors likely to hold onto NZ$ if Fed doesn't raise interest rates as quickly as they thought'

On April 30, the Reserve Bank of New Zealand reviews the OCR, which it's expected to leave at 3.50%. And the US Fed's Federal Open Market Committee reviews its Federal Funds Rate on April 28 and 29.

The latest closely watched US non-farm payrolls report, out over the weekend, showed employers added 126,000 staff during March. According to Bloomberg, this was the fewest jobs added in one month since December 2013, bringing an end to a run of 12 straight months of 200,000-plus monthly gains, and was well below the median analyst forecast for 245,000 new jobs.

As noted in our monthly currencies review last month, financial markets are expecting the Fed to hike interest rates this year, probably in June, for the first time in nine years. However, Bell says the latest non-farm payrolls figures are seeing some observers question this outlook.

"We have seen some analysts come out and say 'maybe this is going to see the Federal Reserve push out the start of the tightening cycle.' The Fed Funds rate there is currently set at 0% to 0.25% so we're just talking about them starting to hike interest rates. At the start of the year we were probably looking at June. If we see another weak employment number out of the US for April, I think we'll definitely see that get pushed out, potentially until the fourth quarter of this year, or even into 2016," Bell says.

Any ongoing weakness in US employment data, and therefore delay in a US rate hike, will flow through to New Zealand dollar strength, Bell points out.

"The thing about any weakness we see in the US employment numbers is it's going to keep the odds of interest rate hikes in the US on hold a little bit longer. And that's actually pretty positive for risk sentiment which will favour currencies like the New Zealand dollar. Our (3.50%) cash rate is pretty much the highest out of the developed economies. So investors will be more likely to want to hold onto our currency if the Fed aren't going to be raising interest rates as quickly as they thought."

Kiwi strong against pound too

Meanwhile, attention's also focused on the British pound ahead of Britain's May 7 general election, which has a far from certain outcome with potential for a hung parliament. Bell notes the NZ dollar has risen towards 51 pence having been as low as 47p last September.

"The election result doesn't look like it's going to be very certain. The other thing in the UK is expectations around the Bank of England actually hiking interest rates have come back as well. So we don't think the Bank of England are going to hike interest rates this year, which again is making the pound less attractive to investors from a yield point of view," says Bell.

In the video we also discuss Greece, the upcoming RBNZ OCR review, and the strong NZ dollar story.

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Dan Bell is director of sales at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.