Opinion Joost Derks

Are the Aussie and Kiwi dollars taking flight?

May 22, 2024 - Joost Derks

It is not often that the southern hemisphere experiences a more eventful week on currency markets than the northern part of the world. However, due to an interest rate decision in New Zealand, the Kiwi and Aussie dollars are currently in the spotlight.

Australia and New Zealand rarely feature prominently in reports in Dutch newspapers or on news websites. The focus of the news is primarily on the Western world and regions where tensions are high, such as the Middle East and Ukraine. In various respects, however, the countries 'down under' do indeed set the tone on the global stage. For example, on January 1, Wellington is the first major capital to ring in the new year. And in the financial world, the central bank had a world-first with a 2% inflation target. In 1990, the Reserve Bank of New Zealand (RBNZ) adopted this suggestion from then-Finance Minister Roger Douglas to get rampant inflation under control.

Challenging Inflation Battle Today, almost every Western central bank pursues a similar inflation level. Despite this relatively long experience, the RBNZ has not been faring well in the fight against inflation recently. In the first quarter, inflation was at 4.0%, above the official expectation of 3.8%. This makes inflation in New Zealand a bigger problem than in Europe or the United States, where core inflation stands at 3.6% and 3.1% respectively. Moreover, it looks like inflation in the Western world will decline further in the coming months. This creates room, particularly for the European Central Bank (ECB), to go beyond a first rate cut that has already been widely anticipated.

Patience Until 2025? Because inflation figures in New Zealand are only released quarterly, the RBNZ has much less room for maneuver in the short term. A bit further afield in Australia, it is also uncertain whether there will be a rate cut this year. In March, inflation edged up to 3.5%. The figures for April will be released in a few days, but the strong labor market makes it unlikely that the Reserve Bank of Australia (RBA) will be tempted to consider a rate cut anytime soon. In April, 38,500 jobs were added in Australia, significantly more than the 23,700 that were expected. Currently, unemployment hovers around 4%.

World Travel Becomes Even More Expensive Due to the combination of a tight labor market and inflation clearly above the RBA's target, the first rate cut may well be delayed until 2025. Since early May, the exchange rate of both the Australian and New Zealand dollars has risen by a few percent. The RBA will not meet to discuss interest rates until mid-June, but the RBNZ is meeting today (May 22). At the previous meeting, the bank hinted that a rate cut might come in the third quarter. If recent inflation figures provide reason to wait a bit longer, the increasing interest rate differential with the ECB will soon provide tailwinds for the New Zealand dollar. For those planning a trip around the world, it might be wise to postpone a visit to the countries down under for now.

Joost Derks

Joost Derks is a currency specialist at iBanFirst with over twenty years of experience in the foreign exchange market. This column reflects his personal opinion and is not intended as professional (investment) advice.

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