By Alex Tarrant
Get used to a New Zealand dollar above 75 US cents. It's not going to go down anytime soon because we're so relient on borrowing foreign money to keep ourselves afloat, and things are going to stay that way.
That was the message from Prime Minister (and former currency trader) John Key to New Zealand journalists on Thursday, and the Wall Street Journal in Australia over the weekend:
"We are concerned at the level of the exchange rate because we think that above $0.75 [U.S.] it's very difficult for our export sector," Mr. Key said [to the WSJ], adding that he doesn't see a drawback in the Kiwi's strength in the near term. "It's not a story I think is going to reverse anytime soon. I think we're in a new band now for a while and I don't think it's going to go away."
And the reason? They just love our government bonds:
"There has been significant foreign interest, particularly out of China, but right across the world," Mr. Key said. "We think one of the reasons why the Aussie dollar and New Zealand dollar are so strong is that foreign interest in the securities market."
'Hard to get it down'
On Thursday last week I asked the Prime Minister if we should just get used to a New Zealand dollar at 80 US cents (see video above).
The high dollar did bring with it some good news, Key said. It was taking pressure off Reserve Bank governor Alan Bollard to raise interest rates by helping him control imported inflation:
“We can see that inflation now is relatively low, in fact we saw the last quarter was deflation effectively. From that perspective that’s taking pressure off Alan Bollard. The probability of him raising interest rates any time soon is very low because of that, so [the high New Zealand dollar is] helping him do his work," Key told media after giving a speech in Auckland.
Key acknowledged it was difficult for non-commodity exporters to compete with a high exchange rate.
It had been the government’s view for some time that it would like a lower currency. However it had also acknowledged that for an economy like New Zealand, with a free floating exchange rate, that imported a lot of capital, that was a “very difficult thing to achieve,” he said.
What happened to US dollar weakness?
Key's comments in Australia came after the New Zealand dollar had shot up towards a four-month high just under 82.5 US cents.
Back in May last year that would have been big news. On May 30, 2011, interest.co.nz reported Key's thoughts when the NZ dollar had hit a post-float high of 82.16 US cents. That was huge back then. Never seen before. The currency was in unchartered territory. No one knew how high it might go.
Back in May, Key said the main reason for the high New Zealand dollar was US dollar weakness as the US Federal Reserve printed money hand over fist.
“The reason in my view that the New Zealand dollar is trading at such high levels against the US [dollar] is because of inherent weakness in the US [dollar], it’s because of the size of the [government] deficit in the United States of America and the enormous amounts of debt that economy is producing, and the fact that that debt is being funded through quantitative easing," Key told reporters.
The high dollar was also partly due to 'good news stories' out of New Zealand, like our large merchandise trade surplus.
And was it partly due to foreigners buying our government bonds? He wouldn't really say:
Asked whether government was also partly responsible for demand for the New Zealand dollar by auctioning off large amounts of Treasury bonds, Key replied:
“Well, look, there’s lots of ways of looking at this. The other argument you could say is we’ve been taking, I think, very prudent steps to get the books back in order and that’s likely to see interest rates stay lower for longer.
"It doesn’t mean there won’t be a cycle, of course there’ll be a cycle – as economic growth picks up, naturally you expect interest rates to rise," Key said.
“But we think relative to what is proposed by Labour, we can keep interest rates lower than them, and we’re at lows that we haven’t seen since 1964,” he said.
“In the final analysis this is largely a US dollar story than a New Zealand dollar story. There are bits that are encouraging the international markets – that’s a positive. As I say, New Zealanders will pay less at the pump than they otherwise would do, so that’s the good news part of the story.”
From May, the currency kept rocketing up. On August 1 last year it hit 88.4 US cents.
Again, this was more a US dollar story, Key said. Markets were re-weighting US and New Zealand assets due to concerns over US government debt ceiling talks. Money from the Fed's quantitative easing was leaving the US, pushing its currency down, and hence ours up.
Asked at the press conference whether New Zealand should look to tax 'hot' foreign money coming into the country and driving the exchange rate up as a way to disincentivise this, Key replied:
“That’s very dangerous territory for a country that’s capital strapped, that has massive net external liabilities. No OECD country borrows more of its borrowing from foreigners than New Zealand. So if you put a tax on that you have to get into the definition of what is hot money, what is legitimate investment in New Zealand."
"You run the risk that you ultimately force up interest rates, and that’s a more expensive burden on the economy. So I don’t think that’s practically going to work," Key said.
"Interestingly enough if you look in the United States, one of the big arguments that Secretary Geithner, that Ben Bernanke and Obama all made to me was that actually a high exchange rate is, they believe, something that they’re highly supportive of," he said.
"The reason for that is they believe it leads to more benefits than the opposite.”
No OECD country borrows more of its borrowing from foreigners than New Zealand...
So we're capital strapped. This export-led economy doesn't have enough dosh to pay for its standard of living so we borrow it from overseas, driving our exchange rate up, hurting our export-led economy.
It's a vicious cycle.