Here in New Zealand, the recession ended in the June quarter and we are benefiting from a resilient Australia, which not only skirted recession altogether, but also emerged as one of the few trusted, financial systems left in the world.
The kiwi pushed higher still after figures showed unemployment, typically the lagging indicator of a downturn, shrank in Australia, stoking expectations that the RBA will raise rates again soon. Where Australia goes, New Zealand is sure to follow, but how soon and by how much?
Officially, RBNZ Governor Alan Bollard won't move to raise the official cash rate until the second half of 2010. Traders are pricing in 150 basis points of OCR increases in the next 12 months, according to a Credit Suisse Index based on overnight swaps. That suggests they're betting Bollard will get going sooner.
Business confidence rebounded to a decade high in the September quarter and early indicators such as credit and debit card spending suggest consumers are loosening their grip on their wallets. Dairy farmers, meanwhile, are preparing for a recovery in payments, as commodity prices recover from their lows of early this year.
The high kiwi dollar is a tension point for Bollard, because it restrains export growth while making imported goods cheaper. As is usual when the currency stays uncomfortably high, he found a way to signal his displeasure.
"The recent appreciation of the exchange rate has not supported the shift towards the export and import-competing industries that will be necessary to improve this situation," Bollard said in a statement released with the RBNZ's annual report. "On these trends, there is a real risk that recent improvements in the external balance will be reversed."
Still, he's in the central bank's perennial bind. He can't afford to signal to the markets that rates will rise any faster than the official timetable, for fear of driving the currency even higher. Strategists are predicting the kiwi will break through 75 U.S. cents.
To be sure, pressure is still only moderate for Bollard to commence a tightening cycle. Inflation, which sailed over 5% in the third quarter last year, probably shrank to an annual rate of 1.2% in the same period of this year. That's close to the bottom of the central bank's 1%-to-3% target range.
There's still scope for Australia's dollar to outperform the kiwi. The RBA's cash rate is now 75 basis points higher than the RBNZ's OCR and that's a yield advantage hot money will flow to. Traders are betting on another move by the RBA before New Zealand's central bank raises interest rates.
That all suggests Australian assets may be appealing to New Zealanders because of the potential extra gain from the currency. Time to take a closer look at the S&P/ASX 200 Index?
And for politicians keen on Australasian monetary union to start looking for benefits of lashing the New Zealand economy more closely to Australia's, as the Lucky Country emerges as a new global financial safe haven.