Three of the most powerful men in the global economy, Barack Obama, Tim Geithner and Ben Bernanke, told Prime Minister John Key they were highly supportive of a strong exchange rate, while Key noted to them the detrimental effects their money printing policies were having on New Zealand's economy.
Meanwhile Key says the best way New Zealand's government can help the exporting sector here is by creating an environment to make local companies as competitive as possible to help them deal with the surging exchange rate.
The New Zealand dollar hit a new post-float high over 88.4 US cents on Monday after Democrats and Republicans in the US indicated they had reached a deal for raising their government's US$14.3 trillion debt ceiling and cutting its budget deficit. However ratings agencies might still decide this initial move to tackle the US government's deficit is not enough, with markets still not completely confident the deal will fix problems in the world's largest economy.
The surging New Zealand dollar has led to calls from the Labour Party in New Zealand that government should look at ways to control the exchange rate, with intervention by the Reserve Bank to try and force the currency down one option alongside new tools for the Reserve Bank to accompany monetary policy such as the ability to control loan-to-value ratios.
But Key has repeatedly come out strongly against intervention, saying the surging New Zealand dollar is primarily due to an "inherent weakness" in the US currency as the Federal Reserve prints money (quantitative easing), and as investors increasingly see US assets as riskier bets and New Zealand assets relatively safer.
“The high exchange rate obviously presents real concerns for those that are not commodity linked, have no imported component of the product that they produce. For the most part, where we face a competitive exchange rate, as we do with Australia, that’s to the benefit of those exporting companies," Key told media at his weekly post-cabinet press conference in the Beehive on Monday evening.
"But it’s not all bad news. When we have a high exchange rate it certainly takes the pressure off consumers in terms of imported items – the price of petrol – and takes some pressure off the Reserve Bank in terms of imported inflation. So for the most part it’s not an entirely negative story, but it is putting some pressure on those companies,” Key said.
Pressure off NZ$ in short-term?
What had happened in the US, where it appeared both sides have compromised on debt ceiling and deficit reduction plans, could help alleviate some upward pressure on the New Zealand dollar at least in the short-term.
“What’s been putting enormous pressure on the exchange rate has been the uncertainty in the US financial markets, and the fact that no one could rule out that the US could default, although that was seen as very, very unlikely," Key said.
"I think the reality is that it’s one thing to get a deal in the US and obviously that’s what’s happened now if we accept that that’s the likely outcome as a result of the meetings in the United States today. But we still see in the United States a very, very heavy debt burden and we’re seeing quite sluggish growth, high levels of unemployment, and that is putting a lot of pressure on the US economy," he said.
"That’s one of the reasons why New Zealand assets have been re-rated, and US assets have been re-rated negatively. That position’s not changing."
'Those who tried, failed'
What the government could do was try and help New Zealand companies become as competitive as possible, rather than intervening in currency markets.
“That means the process and the policies that we’ve followed. Making sure that we take the burden off redtape, making sure labour markets are flexible, making sure infrastructure’s there," Key said.
"If you go and have a look at the track record of countries that have intervened in their exchange rate, then they’ve been spectacularly unsuccessful. And there’s no particular reason to believe that New Zealand would be any different," Key said.
"It’s quite possible you might hit the top occasionally [with intervention], or the bottom if you’re trying to go against the trend, but for the most part it hasn’t been successful strategy for Japan or Australia or Switzerland or many other countries,” he said.
“At the moment you’re up against a massive economy that’s having substantial financial issues. So on that basis they’re re-rating the New Zealand exchange rate. Hopefully it’ll turn around.”
'I told Bernanke about QE'
Meanwhile Key said he raised the issue about the effect quantitative easing by the US Federal Reserve was having on New Zealand’s economy, by devaluing the US dollar, effectively pushing our currency up.
“He just reiterated his public comments which is that it’s [a third round] not likely at this time,” Key said.
'Tax on hot money dangerous'
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.”