Australians are used to suffering humiliation at the hands of the Kiwis on the sporting field, not counting the most recent battle of course. We may soon have to add economic performance and currency values to the list of subjects we’d prefer not to discuss with New Zealanders. There’s a real possibility that before too long an Australian Dollar will buy less than one New Zealand Dollar.
Of course exchange rates are not really just about scoring economic performance, especially in respect of those parts of the economy that a nation can control itself. At the end of the day exchange rates are about trade and investment flows. Amongst other things, they are forward looking and very much impacted by investor sentiment. They are also dependant on a range of uncontrollable, exogenous factors. In the case of Australia and New Zealand, the relative performance of world prices for our biggest exports, iron ore and milk, can for example have a significant bearing on the exchange rate
All that said, there are a lot of similarities between our economies. They are both relatively open, commodity exporting economies with similar government and legal systems. The Australian Dollar is now at a record low against the Kiwi. So even looking through all the various cycles of the past 30 years, it’s difficult to escape the conclusion that the record low in AUDNZD is at least, to some degree, a reflection of structural underperformance by Australia in recent years.
It wasn’t too long ago that Australia was riding high on a combination of strong population growth, China’s booming economy and the enduring legacy of the economic reforms of the 1980’s and 1990’s. But hubris has set in. Reform has been scarce over the past 15 years while the need for it has grown given technological developments and changing global economies. Now the chickens are coming home to roost. New Zealand is running a budget surplus while our deficit is ballooning. Consensus forecasts have New Zealand’s GDP growth at 3% this year and its unemployment rate at 5.2%. Australia by comparison, is forecast to have GDP growth of 2.4% and an unemployment rate of 6.5% through 2015.
So while the Aussie Dollar is still well above record lows against other major exchange rates, perhaps Australians will be right to feel a bit uneasy if the Aussie slips below parity with the Kiwi.
AUDNZD chart analysis
The weekly chart below tracks the Aussie’s decline from its post GFC peak against the Kiwi at $1.3796.
Technical traders would describe this trend as an “impulsive” one. This is not only because the Aussie has lost 26% against the Kiwi over 4 years. One of the hallmarks of a strong, directional movement in markets is that the corrections are relatively small compared to the moves in the direction of major the trend. In a major down trend like this, the corrective rallies tend to stop well short of the last major lows. By comparison, weak trends tend to have a choppier, over lapping appearance.
A quick eyeballing of the chart below shows that AUDNZD fits this impulsive pattern. Sellers have been quick to jump on rallies. Unfortunately for the Aussie, the downtrend has kept its impulsive, non-overlapping characteristic after the last major correction ended with peak at “4”. At this stage there is no indication the downtrend is about to end.
Fibonacci traders often use projections of past trends to identify possible turning points in markets. This can be particularly useful when you are in new low ground with no traditional support levels for guidance as is the case for AUDNZD at the moment.
There are a number of possibilities for potential Fibonacci turning points here, but the first one I have on my watch list is at around parity and is shown on the chart below. Two Fibonacci projections form a cluster at around parity. These project that the swing down from the peak at “4” will be:
- 2% of the length of the whole move down to “3” and
- 8% of the length of the correction from “3” back up to “4”
National pride is resting on this Fibonacci projection holding above parity but I fear this may be about the equivalent of hoping that we can score 10 points against the
All Blacks in the last 5 minutes of a Bledisloe Cup match.