The ducks appear to be lining up for a test of Aussie-Kiwi parity

Robyn Beck /AFP/ Getty Images

There’s just no stopping the New Zealand dollar right now.

Overnight it hit a 17-month high against the US dollar, rising on the back of stronger dairy prices, robust manufacturing data and an ongoing search for yield among global investors.

The NZD/USD daily chart below tells the story. It’s been a relentless, grinding move higher for the Kiwi from the lows seen in January, rising more than 17.5% over the past eight months, no doubt much to the frustration of the Reserve Bank of New Zealand which would like to see it substantially lower.

NZD/USD Daily Chart

With the Kiwi on a tear and the Australian dollar tracking sideways, it now appears that Aussie-Kiwi parity could be on the cards far sooner than what anyone thought, especially given the expectation that New Zealand Q2 GDP — released next week — is expected to show an increase of more than 1% for the quarter.

It’s understandable why so many offshore investors are continuing to pile into the Kiwi. For the moment, it seems Teflon-coated.

To Richard Grace, chief currency strategist at the Commonwealth Bank, whether or not parity is reached will largely be determined by movements in commodity prices key to the New Zealand and Australian economies.

“Earlier this week, stronger than expected dairy prices suggested New Zealand’s terms of trade will continue to rise and outpace the recovery in Australia’s terms of trade,” said Grace. “The AUD/NZD is still some way off the 6 April 2015 record low of 1.0021, and it will take a further relative adjustment to get it down there.”

In a research note released late last month, the CBA suggested that falling dairy production in New Zealand could push the Kiwi dollar towards parity against the Australian dollar.

Joseph Capurso, a colleague of Grace’s, suggested that a shrinking dairy herd in New Zealand, coupled with expected seasonal weakness in iron ore prices, looked set to “bear down on AUD/NZD”.

On Wednesday the benchmark spot price for 62% iron ore fines fell to a 6-week low of $58.46 a tonne, according to Metal Bulletin.

And it’s not just fundamentals that are working in the favour of the Kiwi right now. According to Citibank’s FX strategy team, technicals also point to the AUD/NZD moving lower.

In a note released in August, Tom Fitzpatrick, Shyam Devani, Dan Tobon and Beimnet Abebe, strategists at the bank, stated that a close in August below 1.04 “gives further confirmation a move to parity is likely”.

The AUD/NZD closed August at 1.0361.

Though the Kiwi has tried and failed on several occasions to hit parity with the Aussie, it appears that the ducks are lining up for a sub-1 figure being reached.

The AUD/NZD currently buys 1.0281.

AUD/NZD Daily Chart