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Roger J Kerr finds the calls for 'fortress NZ' exchange rates a disturbing misunderstanding of the damage they would do. Your view?

Posted in Currencies

 By Roger J Kerr

Yet again the Kiwi dollar has failed to hold onto its gains above 0.8400, largely due to global investors/currency traders being unwilling to buy the Aussie dollar aggressively in the $1.0500’s against the USD.

Despite improving Chinese economic data, improving hard commodity prices and a weaker USD against the Euro, the Australian dollar has not been able to appreciate further over recent weeks.

Lower gold prices as global financial risks reduce may be one reason for the relatively poor AUD performance in the circumstances, however increasing expectations of weaker domestic (non-resources sectors) economic data in Australia appears to be behind the reluctance to buy the currency.

The Aussie moneymarkets are currently pricing-in a further 0.40% reduction in the OCR by the RBA this year.

There is a major support area for the NZD/USD rate at 0.8250; a break below this point coupled with the EUR/USD rate reversing to $1.3000 from above $1.3400 may well provide the market environment to send the Kiwi to even lower levels.

As the AUD/USD chart below depicts, the Aussie dollar has encountered major resistance at the $1.0600 level over the past six months and a fall below $1.0400 breaks the uptrend support line.

“Biological risk” raised its head as a new factor influencing NZD/USD exchange rate movements last week as the DCD traces located in our dairy exports was widely reported internationally. The rumours, speculation and headlines may have sent a brief scare across the FX markets, however the fact that the amount of DCD found was 100 times less than the European allowable limit does render the issue as immaterial.

Nevertheless, the media reports do remind us that perception is often more important than facts and the NZ economy (thus currency value) is always vulnerable to agriculture related event risks.

The media is reporting the woes of some exporting manufacturers who seem to want a subsidy from NZ taxpayers against the USD currency being weak.

New Zealand abandoned subsidies in the late 1980’s as they were detrimental to our economic well-being and distorted investment and a whole lot of other business behaviour. It is unfortunate the media does not also report the companies that do hedge their FX risks which buys them time to adjust their business models to the reality of an 80 cent exchange rate.

What is disturbing about the exporters fronting the manufacturing crisis inquiry (sponsored by left-leaning politicians) is that they are seemingly harking back for the previous “fortress New Zealand” environment that does not exist in today’s globalised economy.

The “high” exchange rate is an easy thing to blame for poor performance, however it is a financial risk for these businesses that can be managed, contained and spread just like any other business risk. Cries for special treatment for this sector of the economy should and will fall on deaf ears.

The RBNZ does now have other tools in its kit-bag to contain inflation rather than relying solely on ramping up interest rates when the economy starts to heat up.

These “macro-prudential” measures potentially being enforced on the banks are the funding ratio, LVR ratios and capital adequacy ratios.

Changes to any of these will slow bank lending, credit growth, the housing market and thus GDP growth that may be causing the inflation pressures.

The Government and the RBNZ need to respond to the headlines coming out of the manufacturing inquiry with some of these facts.

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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

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16 Comments

Let's just carry on the way

Let's just carry on the way we are with net foreign debt headed for 84% and Current Account deficits in the    7 to 8 % range. 
Trade deficit now $ 2 Billion worse than last year with a current account blowout headed our way. So now we pay the interest bill by further borrowing - a Ponzi scheme by any definition.
Argentina and Brazil  were forced into " credit events " at far lower external debt ratios.
Soon our exports will be less than our interest bill - then it will be all over.
Borrowed money on borrowed time !

Why is it when any one sector

Why is it when any one sector of the economy suggests the government put out a sea anchor to steady the boat - folks of Roger's ilk portray it as a 360deg turn back to the shores of our Muldoonian past? 

Because they are wedded to

Because they are wedded to neoliberal doctrine

Guys like roger have no doubt

Guys like roger have no doubt done very well out of the neoliberal paradigm of the last 25 years so that do doubt colours their worldview. Roger clearly despises the left. Me? I want pragmatic, effective policy that might include both measures traditionally embraced by the left and right

Roger wrote "against the USD

Roger wrote "against the USD currency being weak"
psst, I'll let you in on a secret, but it may come as a shock. It is not just the USD. In fact, pretty much every country in the world is trying to weaken their currency. If you are the only person who believes you have magic powers, you should ask yourself "am I crazy". If you are the only country that believes in a magical fair free market, you should probably ask the question "is what we are doing crazy". In reality all the inquiry is doing is asking can we, for the sake of the whole country, do better. Not committing economic treason.
Though, to quash such treasonous questions all the financial sector has to do is demonstrate how sustaining the status quo is better for all the people in the country. I realise this is setting the bar a little higher than demonstrating the present track won't trash the manufacturing and productive sectors leading to a dramatic crash ofthe overal economy, but I'm sure the evidence of the common sustainable good the current settings are doing must be there (since those who have benefited so much from it are so opposed to debate, clearly the evidence must be inarguable, it is just those who know it must be strangely unable to articulate it. Maybe some kind of strange Egpytian tomb curse situation, not that I'm suggesting there is looting of the remains of the ecomony going on). 

Ideological dogma aside there

Ideological dogma aside there are some points worth noting:
 
Courtesy of ZH: Policymaker's Guide To Playing The Global Currency Wars
 
Setting a currency line in the sand is risky for countries with attractive countries (sic)
Policymakers with attractive currencies, such as AUD, CAD or high quality EM find the Swiss nuclear-option less attractive than at first glance.  If the RBA were to decide that 0.95 was the AUD ceiling, they would soon discover that there was a lot of willingness to sell USD, GBP, EUR and JPY and buy RBA.  Australian reserves would shoot up and the portfolio would consist of currencies that the global private and official sectors want to dump.  In addition the portfolio yield would be essentially zero, so they would be in a significant negative carry situation.
 
If they thought these currencies were good investment, they could just go out and buy them, but if they accumulate them as a result of pegging their currency, it is hard to argue that the accumulation is voluntary.  This has been China’s and other major reserve managers’ downside to their intervention versus the USD. At a certain point your reserves portfolio becomes big enough and bad enough to be an issue, even if competitiveness was the highest priority originally.
 
Finally, as an endnote we reiterate the other reality of currency wars.  Policymakers do not use FX as cyclical stimulus because of its effectiveness. They use it because they have hit a wall with respect to the effectiveness of fiscal and monetary policies, and are unwilling to bite the structural policy bullet.  In advanced economies the boost from a weaker currency is much less than advertized in Econ 101, with exporters often taking the higher margin in the hand than the higher export volume in the bush. So if currencies are going to stimulate growth they have to move a long way.
 
 

I don't think anyone is

I don't think anyone is arguing for a currency peg in NZ which requires accumulating foreign reserves. The rest of the world is embarking on QE to devalue their currencies which involves increasing  the supply of the currency without buying foreign reserves (they buy debt in their own currency instead)

Stephen, Thanks, ZH's points

Stephen,
Thanks, ZH's points clearly have some validity, and are an important part of the debate- better than the government is managing by just saying there is nothing that can be done.
To challenge ZH's points::
First, as Julz notes, we seem to have the opportunity to short circuit say the Treasury Debt Management Office borrowing billions from offshore, by printing and funding that ourselves, at least to the point where the exchange rate is stable. So no foreign currency transaction costs or risk
If, from ZH's example the RBA did set a ceiling (and I actually think they might have now done so looking at their exchange rate the last 2-3 months), and they print AUD to buy foreign currencies, then the cost to the RBA is minimal- arguably free in fact. And they have it in their powers to print as much as needed to in theory never lose; but even if they do lose a little, the positive effects of a stable/competitive currency would massively outweigh any such costs. It also would give a signal to those playing with their currencies in the hope of constant appreciation, that that will stop.
The point on exporters just taking a higher margin is very valid. You and I from memory agreed a couple of weeks ago that foreign car exporters into NZ, and their dealers, have kept stupendously high margins. So the effect is happening; only we NZ consumers are the suckers.
While I would advocate a say 10-20% devaluation, realistically settling for a ceiling in the NZD is probably the best we can hope for, and the economy can then slowly adjust. A steady currency would not allow the pricing effect ZH worry about.

dh....best post I've seen

dh....best post I've seen here in a while, will somebody please relate the sentiment below to Wheedler, because if that does not at least make him stop and think, then I fear the loonies are runing this asylum.
 
 
If you are the only person who believes you have magic powers, you should ask yourself "am I crazy". If you are the only country that believes in a magical fair free market, you should probably ask the question "is what we are doing crazy".
 
 
but I'm sure the evidence of the common sustainable good the current settings are doing must be there (since those who have benefited so much from it are so opposed to debate, clearly the evidence must be inarguable, it is just those who know it must be strangely unable to articulate it. Maybe some kind of strange Egpytian tomb curse situation, not that I'm suggesting there is looting of the remains of the ecomony going on). 
 
a ripper thank you..!

Well said. regards

Well said.
regards

This is a supply and demand

This is a supply and demand problem. The more people want the dollar, and the fewer dollars there are, then the higher the price.
 
We should tackle the problem at both ends. Increase the number of dollars available and reduce demand.
We can reduce demand as follows.
Overseas investors have to convert their currency into ours to buy our houses. This puts pressure on the dollar and on house prices. We can, and should, stop this. In fact stop all land sales, including farms, to overseas investors.
 
The government can stop borrowing and start printing. That will further reduce pressure on the dollar.
 
The introduction of LVR's will also reduce pressure on the dollar.
 
We do have choices, but ideology keeps getting in the way, and that is what has to be changed.
 
 

This is a supply and demand

This is a supply and demand problem. The more people want the dollar, and the fewer dollars there are, then the higher the price.
 
We should tackle the problem at both ends. Increase the number of dollars available and reduce demand.
We can reduce demand as follows.
Overseas investors have to convert their currency into ours to buy our houses. This puts pressure on the dollar and on house prices. We can, and should, stop this. In fact stop all land sales, including farms, to overseas investors.
 
The government can stop borrowing and start printing. That will further reduce pressure on the dollar.
 
The introduction of LVR's will also reduce pressure on the dollar.
 
We do have choices, but ideology keeps getting in the way, and that is what has to be changed.
 
 

It should also be remembered

It should also be remembered that NO ONE is going to buy our dollars just for fun, they want to make MONEY from their investment in NZ dollars. That puts them at a disadvantage.

Im curious why the OZ markets

Im curious why the OZ markets are pricing in a 0.4% drop in the Ozzie OCR yet NZ's OCR by some ppls estimation is likely to go up.
regards

because .. what is not

because .. what is not reported in the nz press is what is going on under the radar in oz, the number of medium sized businesses folding, going into administration, the twin supermarket duopoly squeezing the shit out of their suppliers, coz they can import food cheaper, because of the high AUD, (ya wanta see the frozen crap they are bringing in from Ireland), staff cuts by qantas airlines, HUGE staff cuts by the queensland government, slash and burn by the nsw and vic governments, because the federal government is trying to end the financial year with a surplus (at all costs) and thus crashing the federal funding to the states. The RBA will panic. The latest company to go into administration last week was Wettenhalls, about 1000 drivers and trucks, a logistics trucking company identical to Linfox except they truck into regional centres, and they have blamed the duopolists coles and woolworths