Will the Aussie and Kiwi dollars take wing?

It's not often in currency markets that the Southern Hemisphere experiences a more exciting week than the Northern part of the world. However, an interest rate decision in New Zealand has put the Kiwi and Aussie dollars in the spotlight these days.

Australia and New Zealand are rarely mentioned in reports in Dutch newspapers or on news websites. The focus of the reporting is mainly on the Western world and on areas where tensions are high, such as the Middle East and Ukraine. In several respects, however, the countries 'down under' certainly set the tone on the world 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 has the world's first in terms of an inflation target of 2%. In 1990, the Reserve Bank of New Zealand (RBNZ) adopted then-Finance Minister Roger Douglas' suggestion to control skyrocketing inflation.

Difficult inflation battle
Today, almost every Western central bank targets a similar level of inflation. Despite its relatively long experience, the fight against inflation has not gone very well for the RBNZ in recent times. In the first quarter, inflation of 4,0% was above the official expectation of 3,8%. This makes inflation a bigger problem in New Zealand than in Europe or the United States, where core inflation is 3,6% and 3,1% respectively. Moreover, it looks like inflation in the Western world will fall further in the coming months. This creates room for the European Central Bank (ECB) in particular to go further than a first interest rate cut, which has already been amply anticipated.

Please wait until 2025?
Because inflation figures in New Zealand are only released once a quarter, the RBNZ has much less room for this for the time being. A little further on, it is also questionable in Australia whether there will be an interest rate cut this year. In March, inflation rose slightly to 3,5%. The April figures will not be released for a few days, but the strong labor market makes it unlikely that the Reserve Bank of Australia (RBA) will be tempted to consider an interest rate cut in the near future. In April, 38.500 jobs were added in Australia. That is much more than the 23.700 expected. Unemployment currently hovers around 4%.

Traveling around the world will become an even more expensive affair
Due to the combination of a tight labor market and inflation that is clearly above the RBA target, a first interest rate cut may not take until 2025. Since early May, the exchange rate of both the Australian and New Zealand dollars has risen by a few percent. The RBA won't meet on interest rates until mid-June, but the RBNZ is already meeting today (May 22). At the previous meeting, the bank hinted that there may be an interest rate cut in the third quarter. If the recent inflation figures give reason to wait a little longer, the increasing interest rate difference with the ECB will soon become a tailwind for New Zealand. For those planning to travel around the world, it would be wise to postpone a visit to the countries down under.

Joost Derks

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

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