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NZ manufacturers suffer, Australian assets look cheaper as dollar parity looms

New Zealand manufacturing exporters are facing record headwinds from the kiwi's strength against the Australian dollar, with foreign exchange traders and strategists almost evenly split on whether the currencies will reach parity.

The New Zealand dollar touched a post-float record of 96.77 Australian cents overnight and recently traded at 96.53 cents. Six of 13 strategists and advisers in a BusinessDesk survey today say the kiwi dollar will reach A$1 this year. The options market is pricing in a 56 percent chance of parity, according to Bloomberg data.

The kiwi has gained about 9 percent against the Australian dollar since the start of the fourth quarter last year, making New Zealand products less competitive across the Tasman and reducing the value of sales when they are repatriated from the nation's second-largest market. Exports to Australia dropped almost 4 percent in the fourth quarter, government figures show.

The New Zealand economy is on a stronger path than Australia's and the gap may widen amid signs dairy product prices are recovering while hard commodities such as iron ore and coal remain weak. A gap of 125 basis points in New Zealand's favour has opened up between central bank benchmark interest rates and traders are betting Australia could cut rates again.

"Australia is a mine and New Zealand is a farm," said Fergus McDonald, who helps manage about $2.5 billion as head of bonds and currency at Nikko Asset Management NZ. "Economically speaking, New Zealand is on a better trajectory than Australia at the moment and our interest rates are probably going to be higher for quite some time, so that does support a little bit further strength in the kiwi."

The degree that 'farm' products are recovering will be known overnight, with the GlobalDairyTrade auction, after the price of whole milk powder soared at the last sale two weeks ago.

Still, McDonald says it would be a stretch for the kiwi to achieve parity with the Australian dollar and approaching 98 Australian cents would be a good time to sell New Zealand dollars for Australian dollars. "It could get there - records are always there to be broken - but it is getting quite toppy. It would be a relatively short-lived phenomena."

Economists at Bank of New Zealand concur, saying while they wouldn't be surprised to see the kiwi climb further against the Australian dollar, "we do not think parity would be sustainable - the fundamental picture does not justify that."

The strength of the kiwi does increase the purchasing power for New Zealanders looking across the Tasman, though, either as a holiday destination or a target for investments.

"If New Zealand businesses were thinking about expanding their activities across the Tasman, then with the push up in the kiwi dollar, it has only got cheaper for them," McDonald said. "They've obviously got to have a good business plan and not just make the decision based on currency because currencies are very fickle and while the kiwi is high now, come a year's time, it may not so advantageous."