Investor assumptions lump NZ with Australia 

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This week the New Zealand and Australian central banks delivered starkly different assessments on the health of their respective economies.

At the start of the week Australian Reserve Bank governor Glenn Stevens warned in a speech that there was actually a risk he might have to put up interest rates given the strength of the Aussie economy and that he could do so even if unemployment was still rising.

In Australia, housing is rebounding while Chinese demand for its core mineral exports has also returned.

Plus, there has also been a huge fiscal stimulus package from the government keeping consumer demand afloat.

The general tone of Steven's speech was of a country that has not only escaped technical recession but is now poised for a quicker than expected recovery.

Market analysts were surprised and called it 'hawkish'. The Australian and the Kiwi dollars surged against the US dollar as a result.

The New Zealand Reserve Bank governor Allan Bollard was on the other hand far more pessimistic or 'dovish' about the economy than expected, when delivering his official cash rate review on Thursday.

There was no mention of our so-called green shoots i.e. the stabilising housing market or rising immigration.

It was a little strange, as Westpac economists noted, as it was only a couple of weeks ago that he was talking more positively about the local economy and the need to avoid a repeat of the housing boom of recent years.

Why the change in tone in just two weeks?

Has the economy suddenly got worse? Not from what I can see, although the Kiwi dollar hasn't yet fallen back to the levels the Reserve Bank has forecast.

And without that fall in the dollar, the desired economic recovery led by strong export profits, as opposed to borrowing and consumption, is going to be much harder to achieve.

And this is the key.

By highlighting the negative this week, Bollard is effectively, as one commentator told me, playing at currency intervention.

He seems to be trying to second guess currency speculators and convince them their bet on the Kiwi dollar and economy is riskier than they think.

The statement also included a clear threat that if the Kiwi stays up and hurts the economy, he will cut rates again, thereby reducing that crucial interest rate yield that attracts many currency speculators.

NZD swayed by offshore forces

So why has the Kiwi defied gravity when we've slashed interest rates and been in recession all year?

Well for many it's all about the weak greenback.

Investors put off by the US deficit and Federal Reserve money printing look for other investment options when stocks markets are settled.

This year the currencies of commodity based nations have been popular options as they are perceived to be benefiting from recovering commodity exports.

Unfortunately, New Zealand has been lumped in this category.

Unlike Australia with its iron ore sales (so-called hard commodities) to China, we are not actually benefiting from rebounding commodities prices.

Dairy (a so-called soft commodity) is our main export and it is still in the doldrums. It was a point spelled by the Bollard this week.

It all seems a bit unfair. Just when farmers need a lower dollar they don't get it because of an association with our neighbour Australia! (Those favouring a currency union with Australia take note).

Still there was never going to be free lunch for New Zealand and let's not forget out recession has been much shallower than the likes of Ireland, Spain the US or the UK.

That must also be a factor when foreigners weigh up the Kiwi's strength.

In the end we should actually be grateful to the Aussies. Their strong economy and banks are buffering New Zealand. They are our largest trading partner and have provided a crucial leg up to our tourism industry this year.

Without them things would be looking a lot worse.

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