Australia and New Zealand are close neighbours with deep economic ties, similar legal systems, and a shared love of rugby. Their currencies — the Australian dollar (AUD) and New Zealand dollar (NZD) — are both classified as “commodity currencies” and tend to move in the same general direction against the US dollar. But look closer, and the differences are revealing.

The AUD/NZD cross rate — which measures the Aussie against the Kiwi — is one of the most actively traded pairs in the Asia-Pacific region, and understanding what drives it can be valuable for traders, businesses, and anyone who moves money between the two countries.

Similar but Not the Same

Both currencies are free-floating, inflation-targeting, and heavily influenced by commodity prices and global risk sentiment. To international investors, they often look interchangeable. But the underlying economies are quite different, and those differences matter.

Australia has a GDP of roughly A$2.7 trillion. Its export base is dominated by hard commodities — iron ore, coal, LNG, and increasingly lithium. China is by far its largest trading partner, and the Aussie dollar is closely tied to Chinese industrial demand.

New Zealand is much smaller, with a GDP of around NZ$400 billion. Its exports lean on soft commodities — dairy products (particularly milk powder), meat, and forestry. China is also its largest trading partner, but the transmission runs through food demand rather than industrial metals.

This means the two currencies can diverge when hard and soft commodity prices move in different directions.

Interest Rate Differentials

Historically, the interest rate spread between the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) has been one of the most reliable drivers of AUD/NZD.

In the post-COVID cycle, the RBNZ was more aggressive than the RBA — both in hiking rates on the way up and in cutting them on the way down. The RBNZ pushed the Official Cash Rate to 5.50 per cent and began cutting in late 2024, while the RBA peaked at 4.35 per cent and held for longer.

When the RBNZ is cutting and the RBA is holding, the AUD/NZD cross tends to rise (the Aussie strengthens against the Kiwi). When the positions reverse, the cross falls.

In 2025, the rate paths of the two central banks remain a key variable. The RBNZ has been more dovish, signalling further cuts in response to a sluggish domestic economy. The RBA has been more cautious, which has supported the Aussie side of the cross.

Dairy vs Iron Ore

The commodity split between the two countries creates interesting dynamics. Dairy prices — tracked by the Global Dairy Trade (GDT) auction held fortnightly — are the most important commodity input for the NZD. The Fonterra milk price, which determines how much New Zealand’s dairy farmers earn, feeds directly into rural incomes, consumer spending, and ultimately the current account.

Iron ore, as discussed in earlier articles, plays a similar role for the AUD.

When iron ore prices rise and dairy prices fall, AUD/NZD tends to climb. When the reverse happens, the Kiwi gains ground. In practice, both commodities are influenced by Chinese demand, but they respond to different parts of the Chinese economy — construction and industry for iron ore, consumer food demand for dairy.

Housing Markets and Migration

Both countries have experienced dramatic housing cycles, and housing conditions can influence currency movements through their effect on consumer spending, banking sector health, and monetary policy expectations.

New Zealand’s housing correction has been sharper. Auckland prices fell significantly from their 2021 peaks, weighing on household wealth and confidence. Australia’s market has been more resilient, supported by record immigration and chronic undersupply.

Migration patterns also matter. Australia has been running very high net overseas migration — over 500,000 per year at its peak — supporting housing demand and GDP growth. New Zealand has experienced significant outward migration to Australia, weighing on its labour force.

Trading the Cross

AUD/NZD is popular among forex traders because it tends to range-trade within predictable bands (roughly 1.05 to 1.15 in recent years), making it amenable to mean-reversion strategies. It also has lower volatility than major USD crosses, which suits traders who prefer controlled moves.

For businesses operating across the Tasman, the AUD/NZD dynamic matters. An Australian company paying suppliers in NZD, or a Kiwi exporter invoicing in AUD, faces real currency exposure. The hedging tools discussed in previous articles — forwards, options, and natural hedges — all apply here.

Looking Ahead

In the near term, the AUD/NZD cross is likely to be driven by the relative pace of rate cuts from the RBA and RBNZ, and by the performance of iron ore versus dairy prices. If the RBNZ continues to cut ahead of the RBA, expect the cross to remain elevated.

Longer term, structural factors — Australia’s growing critical minerals sector, New Zealand’s push into high-value food exports, and migration dynamics — will shape the relationship between these two currencies.

They may be neighbours, but their currencies have minds of their own.

James Hargreaves is a Sydney-based financial journalist covering currencies and macro markets.