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NZ could host a cricket World Cup parity party

The potential for the New Zealand dollar to rise to parity with the Australian dollar is a powerful symbol of how the neighbouring economies have diverged over the last three months.

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Economists are openly talking about the possibility the Kiwi dollar could reach the 100 Australian cent mark in the months to come, having approached its 40 year high of over 96 cents again in mid February.

"Economists are openly talking about the possibility the Kiwi could reach the 100 AU cent mark in the months to come."
Bernard Hickey, Publisher at Hive News

Just as on the cricket pitch, New Zealand has lagged Australia for most of the last thirty years since the flotation of their currencies. But that may be about to change in both the dealing rooms and on the ovals they are sharing as co-hosts of the World Cricket Cup.

Australia's unemployment rate spiked to 6.4 per cent from 6.1 per cent in January and employment fell 12,200, underlining the weakness of an economy struggling to cope with the end of the mining boom and a weak manufacturing sector.

The contrast in New Zealand's jobs data for the December quarter couldn't have been starker. Its unemployment rate also rose slightly to 5.7 per cent, but only because of a rise in the participation rate to record highs. Employment grew 28,000 for the quarter and was up 80,000 from year ago as construction booms in Christchurch and Auckland and buoyant consumer spending boosted activity.

The contraction in Australian jobs fueled fresh speculation the Reserve Bank of Australia will cut its cash rate for the second time in two months to 2 per cent when its board next meets on March 3.

Across the Tasman, the Reserve Bank of New Zealand is sitting firmly on its Official Cash Rate of 3.5 per cent for an economy still growing at an annual rate of more than 3 per cent. It has also strengthened its warnings about a resurgence of house price inflation. That was reinforced by Real Estate Institute figures for January showing annual inflation in north, central and southern Auckland running at over 20 per cent.

The 1.25 percentage point gap between the respective official cash rates is the clearest measure of the economies' diverging trajectories and another incentive for investors to hunt for yield in the New Zealand dollar.

The connections between the two jobs markets are amplifying that divergence. Slowing jobs growth in Australia is encouraging many New Zealand citizens to return home and discouraging New Zealanders thinking of migrating to Australia.

This turnaround in migration flows helped power a surge in net migration to a record high 50,900 in 2014, which in turn pumped up house prices in the most popular embarkation point of Auckland.

Economists and the Reserve Bank of New Zealand had been expecting this net migration to ease off through 2015 as the Australian jobs market recovered, but a further cooling across the Tasman could keep up the pressure on those house prices, economic growth, interest rates and the currency.

A surge towards parity through late February and March could add to the celebrations of holiday-making cricket lovers through the pool stages and on towards the finals in late March.

New Zealand's Black Caps play Australia in a pool match on February 28 in Auckland, which may be too soon to break open the Speights and Victoria Bitter. But if New Zealand's currently in-form cricketers can progress to the final in Melbourne on March 29, that may be long enough for supporters to get more Australian hotels, flights and beer for their Kiwi bucks.

Even the likes of Allan Border and Brett Lee have talked up New Zealand as a potential dark horse to make the final at the MCG against the home team. They would start that match with an equal chance of winning.

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We'll see whether the respective currencies are just as equal on the day. If they are and the Black Caps emerge victorious the party will be epic.

HOW THE TWO 'TEAMS' MATCH UP

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Photo: WELLINGTON, NEW ZEALAND - JANUARY 05: Kane Williamson of New Zealand bats during day three of the Second Test match between New Zealand and Sri Lanka at Basin Reserve on January 5, 2015 in Wellington, New Zealand. (Photo by Hagen Hopkins/Getty Images).

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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