Year in Review: The kiwi's surprising strength

One potential source of relative strength may be the market’s increasingly pessimistic take on the outlook for Australia’s economy relative to the outlook for New Zealand and interest in selling AUDNZD.

Australia’s housing bubble showed signs of a disorderly unwind as 2018 was drawing to a close. The fall in Australia’s housing prices was at least partly triggered by tightening lending standards after a profound and embarrassing review of sharp bank practices under a Royal Commission.

New Zealand’s housing market has also been under pressure, but the focus there under the previous RBNZ governor on macroprudential rules to restrict over-easy lending standards into the sector has helped to  prevented the excesses evident in Australia.

Chart: AUDNZD monthly

Australia is New Zealand’s largest trading partner after China and the AUDNZD rate has declined to the lower end of its multi-year range, with much of the recent part of the move arriving after the RBA admitted that rate cuts and QE are a theoretical possibility if the housing bubble unwind become dire, even while expressing confidence that the next move would be a hike.

If AUDNZD nears parity, it is approaching a rare extreme that historically has proven a bridge too far for NZD strength.

Regardless of the set of drivers, the New Zealand dollar looks very expensive going into 2019 and we suspect it will end next year far weaker than the levels prevailing here at the end of 2018 on value mean-reversion and the risks to global growth.