We can see from the following chart that the NZD is in a long term decline against the AUD. We might ask why, and what prospects are there that this trend could turn around. The NZD:AUD decline since 2005 marks the start of huge capital investments in Australia, which has resulted in Australia's national income and savings surging whilst NZ's has gone backwards. This of course mostly arises due to mining and energy investment in Australia. See chart in Google Finance.
The significant rallies in the NZD that you see in that period relate to rises in NZ interest rates, and the NZ Treasuries efforts to quash NZ domestic spending....which was mostly on the rural batch, as well as the ancillary jet ski, motor bike, fishing boat and jacuzzi which went with it. Today the batch is perceived as a waste of money, courtesy of a change in government policy, which has ceased to reward such lifestyle decisions. Now, a great many NZ'ers are selling their 'sections' they use for trout fishing, or their holiday house by the sea. The market will probably resume however, and the strong Australian dollar might just be the impetus.
Australians have to be asking themselves whether anything is going to change. The answer is Yes, but not for probably another 5-10 years. Why do I say that? Well, NZ has to absorb a great deal of housing debt, so there is not going to be any significant spike in interest rates yet. Australia has even more debt, but far better prospects for paying it off. There will also be a stronger Aust economy, with the prospect of stronger interest rates making it even easier for the AUD to outpace the NZD.
It might not be so evident yet, but I see NZ having its own resource boom in a few years. Why? Well, NZ is a relatively small, unmineralised country. Its rocks simply have not been around long enough, and the mineralised core from the current mountain building will not be exposed for another 10 million years. The country does however have large tracts of maritime territory. In fact its the size of the EC. This maritime territory is known to possess vast resources of methane hydrates. In addition, these offshore sedimentary basins may contain vast oil & gas resources. They have not been significantly tested. Even NZ's sole producing basin - the on & offshore Taranaki Basin has hardly been explored, particularly at depth.
It was only last year that the country commissioned a relatively small oil & gas field called the Tui field. The impact of the field on NZ's terms of trade were significant, despite its small size. The Chinese, Indians and others are going to be looking for cheap energy inventories in future years. With access to such resources tied up by major oil & gas producers, extorting high prices for their products and resources, its probable that places like NZ are going to attract a greater share of the exploration dollars, and some of this will lead to success. A significant find is probable, and for a 4.3mil population, its probable that it will make a big difference, not only in pushing up the currency, but by stimulating interest in NZ's offshore basins, which will attract even more interest.
This will take 10-20 years to unfold of course. The implication however might be significant if you perceive NZ as a nice place to retire, or to buy a holiday house. In the short term, the NZD is certain to continue its fall, but it might be a good idea to consider these factors when considering retirement in NZ. In the short term however:
1. NZ immigration is mostly outwards to Australia - that is - Australia's is growing faster
2. Australian export volumes and prices are fairing better - even though NZ milk and timber is doing well
3. Australian business investment is phenomenable, NZ lacklustre
4. Australian savings are far higher
5. AUD will out-perform the NZD for the next 5-10 years, so expect the NZD and AUD gap to continue its divergence
6. Thereafter (say 15-20years off) you might expect the NZD to recover, and do rather well based on my expectations for the recovery of methane hydrates and conventional oil & gas offshore, as well as the mining of coastal titanomagnetite (titanium-rich iron ore), which will by that time be far more strategically important. Currently Ti-Fe is hard to separate and use, and the appeal of high strength steel alloys is only just starting to take off. NZ deposits are relatively remote, so early mining will be of Chinese, PNG and Russian deposits.
The other important factor when you make these Aust-NZ comparisons is to consider the extent to which NZ will benefit from integration with Australia. The issue of course is that NZ is a lovely place, but nothing happens here. If we want to look at what difference greater integration is going to make, then we only need look at South Australia. Does it benefit from being part of Australia? Not significantly, because like NZ, its a small population remote from the rest of Australia. And NZ is split into two islands, so its like two Sth Australia's. Australia is very much concentrated on NSW, Victoria, Queensland and WA. The other states are really mere appendages to the demand created by these states, whether its in existing population or population growth-related demand.
The appeal of NZ integrating further with Australia is mixed. It will make a marginal difference to NZ's competitiveness, but at the same time it will make it easier for NZ'ers to go overseas to capture some of that income disparity. Of course they can always come back to NZ in around 12 years time (to retire) when the currency bottoms against the AUD. The big difference for NZ will come from access to Australia's capital markets. Already the countries are talking about integrating their respective legal systems. This will make it easier for the countries to jointly regulate and administer business. This will make it easier for Australians to buy property in NZ, and it will make it easier for NZ'ers to invest in Australia, giving them access to a broader variety of investment opportunities. The appealing aspect of this is access to mining investment opportunities, and probably technology investments, as well as helping NZ technologists to finance their developments given the lack of savings in this country. This will of course aid NZ financial literacy....which has already been favourably impacted in Australia by compulsory superannuation, and most particularly a plethora of privatisations there. In NZ, the bulk of the funding for privatised assets was offshore.
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