Of Kangaroos and Kiwis: The dollars down under

The Australian and New Zealand dollars are interesting currencies for speculators, investors, and economists, but are not regarded as major currencies. Their liquidity has traditionally been concentrated in the local markets, but over the past couple of years interest has grown globally, for a number of reasons.

From an economic point of view, one of the most interesting things distinguishing the antipodean currencies from the Canadian dollar, with which they often get lumped together, is that both Australia and New Zealand have significant current account deficits. According to an Economist magazine survey, Australia’s current account deficit is expected to be almost 6 percent this year and a still-wide 5.5 percent next year. New Zealand’s trade deficit is on pace this year to reach nearly 8 percent of GDP, and any improvement next year is likely to be marginal.

Both the Australian and New Zealand dollars have lost ground against the U.S. dollar this year. But their less than 3-percent declines mean that on a relative basis they have outperformed currencies from countries with sizeable current account surpluses, such as Switzerland and Japan. The Swiss franc has declined about 11 percent against the U.S. dollar from January through late October this year and the Japanese yen has depreciated about 11.5 percent over the same period.

In fact, one popular trade this year among some speculative players and Japanese investors has been buying the Australian and/or New Zealand dollars against the Japanese yen. In early October, the New Zealand dollar reached an eight-year peak against the yen and the Australian dollar recorded a seven-year high against the yen. Forex speculators have been drawn to the trade in part to express a favorable view of commodities. Australia, for example, is the world’s fourth largest producer of copper, and copper prices have rallied sharply to new all-time highs. Some traders also emphasize the role of Australia as a producer of gold, which recently reached 17-year highs.