By Roger J Kerr
While the NZ dollar marks time against in the USD, trading in the middle of its well-established 0.8050 to 0.8450 band, it is timely to examine how our exporters have handled the “high” NZ dollar currency conditions of recent years.
Something like the already over-used expression 'the rock star economy', the central bank, politicians and economic/business media commentators still persist in describing the “high” NZ dollar as a “challenging and major headwind” for the economy.
Firstly, a lesson in history, the NZD/USD has been above 0.8000 for the vast majority of the time for three years now.
So “high” relative to what?
Yes, certainly higher than the 0.5000 rate reached briefly in early 2009 when world trade almost stopped at the height of the GFC. However, that was the anomaly in the currency’s recent trading history, the normal and average trading range has been between 0.8000 and 0.8500 for the last three years.
Over recent years the current rate of 0.8280 cannot, and should not, be described as “high”.
Secondly, the NZD/USD exchange rate between 0.8000 and 0.8500 since 2011 has largely been due the US Federal Reserve implementing their QE (Quantitative Easing) monetary stimulus policy of printing billions of additional US dollars. The additional supply was always going to weaken their currency value.
Therefore, NZ exporting businesses selling in USD’s incurred a FX risk that was more to do with a weak USD than any strength of the NZ dollar.
Complaints from some minorities within New Zealand that the NZ Government of Reserve Bank should do something about the “high” NZ dollar to help those exporters were misplaced as there was nothing our authorities could do in the face of the “Bernanke put”.
At the end of the day, the USD weakness was just another business risk that exporting companies need to recognise and do something to mitigate the impact on profitability, jobs and investment.
Rather than moaning about a currency “headwind”, the majority of USD exporters have adjusted by tacking away, changing the boat and in some case finding another harbour to sail in.
Commodity exporters have generally enjoyed higher USD product prices over this three-year period that have off-set the weak USD currency.
Manufacturing exporters have adjusted their businesses models very well to the new norm by buying time with judicious currency hedging policies, increased their USD prices where they can and driven efficiencies in the costs and operations to stay competitive and profitable.
These exporters have also entered hefty dollops of forward hedging contracts when the dips to 0.7600/0.7800 occurred in late 2011, May 2012 and July/August 2013. The more latter dips to get new hedging on board have ended around 0.8100, however higher forward points and using collar options still generate sub-0.8000 hedged exchange rates.
There is no evidence from the various surveys of manufacturing activity in New Zealand that the “high” NZ dollar has seriously dented profits, jobs and business investment over the last three years. Never let the facts get in the way of a good story.
Over the next 12 to 24 months as the US Federal Reserve unwind their QE policy; our USD exporters should pick up a tail wind for a change.
However, there are no guarantees and hedging policies still need to be implemented to reduce volatility and spread risk.
Exporters in Australian dollars who did not implement appropriate currency hedging policies when the NZD/AUD rate was below 0.8000 for so long are now the new complainers.
What is obvious to this observer of currency risk management is that judging by recent profit results of listed NZ companies with major Aussie businesses, smaller exporters with NZD/AUD risks manage their financial affairs in a superior manner to the big boys.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
1 Comments
Roger, It seems very selective to just focus on the last three years when conveniently for your argument, the exchange rate has been 78 to 83 cents. A NZD was worth US 50 cents in 2000, declined to 40 cents over the next couple of years, before climbing progressively to 80 cents by 2008, averaging say 60 cents for that period. Post the major GFC blip, the currency took two years climbing from 70 cents to 80 cents, and has, as you say, hovered there for 2-3 years. There are fundamental reasons to challenge being comfortable with a historically very high exchange rate:
There is a high correlation between a rising exchange rate and a worsening current account deficit. Our current account deficit started the century at -4%, improved over the next two years of a lower dollar to -2%, then progressively worsened to -8% through the appreciation up to the GFC. That shock improved the CAD back to -2%, before we have worsened progressively to -5%, even though terms of trade have not been better since the Korean War.
I would posit that the initial cause of this problem is not a demand for investment, but a supply of foreign capital. If foreigners print enough money, they can buy as much of NZ as they wish it seems, such that our ownership of assets, and net wealth, has significantly deteriorated.
To suggest there is nothing that can be done about this is just not true. Many governments have been and are very active.
The losers are not so much direct exporters; many of them will have rather heroically found ways to adjust their direct costs as you say. Rather, every business is paying 60% more in real international terms for government services, and non tradeable costs, than they were in 2000. The capital flows have also of course fed into very inflated property costs for all. Pricing signals mean New Zealanders are encouraged to buy foreign, and foreigners to look elsewhere.
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