Key: High NZ$ won't go away

Currencies

PM Key says NZ dollar hurting exporters in new band above 75 US cents, and not going to reverse anytime soon

30th Jan 12, 1:11pm by Alex Tarrant

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.”

Capital strapped

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.”

Any ideas?

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.

No chart with that title exists.

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50 Comments

by skudiv | 30th Jan 12, 1:54pm 1327884871

The amount of bonds being bought by overseas money would hardly be enough to even make an uptick. If trade was responsible for the fx rate, you could look at the trade surplus/deficit and currency would follow that very closely. Full of sht again, the FX rate is set by speculators, more long's then short's the currency goes up. Trade is <5% of currency volume. You'd think he knows this, from his time on Wall St.

I seriously don't trust this guy, after all the BS he says.

by Bobbob | 30th Jan 12, 2:15pm 1327886101

Well we did vote in a money man, knwon as the smiling assasin, we get what we deserve, and we are getting a right royal rodgering!

Jokey Smurf is just laughing all the way to his Hawaii paradise, we won't see him ever again once the sh#t hits the fan - listen carefully you can hear it flying through the air now.

by Patricia | 30th Jan 12, 2:22pm 1327886533

I still can't see why we have to borrow when we can print the stuff. And lend that internally if need be. After all we are not Greece. And I don't buy the argument that printing money causes inflation and borrowing it from overseas doesn't. It wasn't just printing money that caused the hyperinflation of the Weimar republic but the speculation that accompanied it.

by Chairman Moa | 30th Jan 12, 3:05pm 1327889128

If you want an example of printing more money and lending it internally - you should look no further than Zimbabwe.. works really well there, the latest note they have is 10 billion ZWD which equivalent to about 2 USD.

by Patricia | 30th Jan 12, 5:09pm 1327896551

But what is the difference between printing money and borrowing it? If the difference is merely quantity then it is easy to solve that problem. Surely printing money means you have control while permitting borrowing the same amount of money from overseas puts those foreigners in control.

by Chairman Moa | 30th Jan 12, 5:36pm 1327898204

Say you own a company worth $1000. You are going to float the company with 1000 shares, each share will worth $1. Now you decided to print a few more shares, say 100,000 shares - you share now only worth 1c/each. This is roughly the same idea of money in circulation, the more money you printed the less they will be worth in international market. Import goods (petrol, farming equipments etc..) will be cost a lot more and our export income will be less. What will we get in return? High inflation. There is a delicate balance of how much money you can print and whether the country income can support it.

by skudiv | 30th Jan 12, 6:03pm 1327899818

Priniting is essentially the government spending more then it takes, and making up the shortfall via bonds. The bonds are always purchased by the Primary Dealers (read big 4 + Goldman Sachs et al.) then sold on the secondary markets to pension funds, other banks, or held as capital to be repo'd at the Central Bank. In other words the inflation comes from the government bonds because they are a certificate that becomes money that the govt spends. If the bonds are bought by a pension fund for cash, no new money is created it is just transfered from the pension fund cash account to the govts account. When a bank does a repurchase agreement (repo) it deposits the bond with the Central Bank, and gets cash from the CB, with the agreement that it will repurchase the bond back at a later date. This is where new money is created. If however an overseas investor buys a bond, new money is transfered into the country increasing the NZD money supply and by definition inflationary. Or if the Central Bank does a form of easing where they outright purchase bonds on the secondary market, (from either banks, pension funds or Kim Dotcom) this creates even more as the bond has directly been converted into cash.

I'm struggling to explain it, it's a convoluted process, but it's the issue of new debt, and in particular govt bonds that are either repo'd or outright purchased, which are the source of inflation, as they increase the money supply without increasing the amount of goods and services, which is inflationary. What matters is how much govts are borrowing, and what is happening to the bonds. If the CB was to go and outright purchase every govt bond in existance, then there will be a lot of people that were holding a certificate, and have now traded that certificate for money. Now they have lots of money to spend, and what will they spend it on?

by economist | 30th Jan 12, 9:07pm 1327910837

"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." John Kenneth Galbraith - Money: Whence it came, where it went.

by Apple tree | 30th Jan 12, 9:43pm 1327912996

Surely by printing money the value of the NZ dollar will drop aiding exporters. By not printing the govt is aiding importers and everyone who is not directly affected by export earnings (in the short term anyway) The govt. is therefore not telling the truth when it says it can do nothing about the value of the dollar.Of course inflation will increase if the value of the dollar will drop but at the end of the day the country requires a competitive export sector just as a house hold requires someone to earn a living wage.

Key is a money man and he supports the money men.

by Apple tree | 30th Jan 12, 9:43pm 1327913003

Key is a money man and he supports the money men.

by Chairman Moa | 31st Jan 12, 12:07am 1327921673

we aren't deaf so no need to repeat...

by David B | 30th Jan 12, 5:44pm 1327898660

How many times do New Zealanders have to be told that New Zealand is a poor country and not a rich first world one? What do Kiwis’ think that actually means? Has the penny not dropped for them yet? As a nation New Zealanders have entrenched socialist tendencies, they vote for the left, largely the Labour Party, vote for more and more and more welfare, celebrate and proudly embrace the queer and contrarian views of ancient hippies, eco-mentalists, and those with ‘values’ achieving nothing other than to suck all the wealth, the opportunity and the right to innovate right out of the economy. At times I feel like modifying Amy Winehouse’s song “They tried to make me go to rehab and I said, no, no NO!” to “They tried to make me make money and I said, no, no, NO!” What do they expect? Do they think they’re going to get an abundance of wealth and prosperity, and sufficient capital to support their phony lifestyle from internal sources?

Give me a break. Get a clue already.

by Gummy Bear Hero | 30th Jan 12, 6:36pm 1327901788

Absolutely right , DB ...... NZ earns more than enough from exports as it is . We really do not need to squeeze more cows or sauvignon blanc vines onto the landscape ......

........ much of what we earn is wasted , pure & simple , wasted .

And the generations of money wasted on welfare have led to what , a happier , more balanced Godzone ? ....... Nope ..... it's just led to an ever voracious appetite for someone else's money to prop up a new set of social welfare fix-it programmes , layered atop the multitude of previous ones , all still in place .......

We waste the money on low grade social welfare and an endless stream of government quangos .

by Plutocracy | 30th Jan 12, 6:44pm 1327902278

Superannuation anyone?

by Gummy Bear Hero | 30th Jan 12, 6:57pm 1327903048

Oddly enough , it was Gareth Morgan himself who said that the universal pension scheme in NZ was affordable ..... although ratcheting it up to retirement age 67 or 68 would've helped ........ and he lambasted Michael Cullen for setting up the Kiwisaver scheme ....

...... and then GM went on to make a fortune for himself from his Kiwisaver fund ......

Any idea how his Kiwisaver clients are doing , making coin hand over fist ?

by Plutocracy | 30th Jan 12, 7:19pm 1327904390

Any party is in power is going to have a hard time cutting the benefit/subsidies that people receive. I do agree with you that we should look to scale back some of these in light of our current financial predicament. Does Key have the gut's to make some tough calls? I don't think so.

In fact, I can't imagine either of the major parties doing anything which may cost them votes, even if it means NZ sinks. It's all rather sad.

by skudiv | 30th Jan 12, 7:26pm 1327904786

They are up 250% thanks to the employer contribution, and govt donation.

Don't mention that govt is borrowing at 4.8% and if we call the kiwisaver donation an investment the returns are <4.8% so in fact this is a fantastic way to waste money. Especially if you are in an aggressive fund.

by scarfie | 30th Jan 12, 6:43pm 1327902228

Just curious David, have you ever "innovated" anything?

by Chairman Moa | 30th Jan 12, 6:51pm 1327902710

In reality, Amy said yes, yes YES to rehab and she then kicked the bucket.. same way NZ is heading...

by powerdownkiwi | 31st Jan 12, 9:11am 1327954283

DavidB - what a rant. I do hope you aren't an ex-editor. It would be a sad indictment, given that journalism should be about ascertaining truths, and that senior journo's could perhaps be leading the way in that regard.

Tell me that's not the case. Tell me you're just a ranting ideologue.

This is nothing to do with red vs blue (or even yellow). This is about absolute limits. Do your homework. You may care to note that the voices sounding warnings are physics experts - Professors in many cases.

http://physics.ucsd.edu/do-the-math

http://www.oilcrisis.com/bartlett/hubbert.htm

Whether you're an ex-journo or not, I invite you to present a reasoned rebuttal.

by steven | 31st Jan 12, 9:27am 1327955254

There wont be an abundance of wealth and prosperity there isnt the energy to underwrite it....

"innovation", yeah right.....instead of creating products, companies and jobs those with capital spent it on property speculation.....

NZ is one of the easiest places to set up a business...plenty of opportunity.....lots of tax offests to help startups.....

This isnt the Govn's fault, they stayed out of the way and let ppl choose how to generate wealth.....

The ppl screwed it up....instead of choosing to work they choose to gamble.....they are about to lose big time.

regards

by Nic the NZer | 31st Jan 12, 9:50am 1327956652

When was the last time the government actually did anything according to the ancient hippies, eco-mentalists or those with 'values'?

You didn't cite a single example as part of your juvenile tantrum, which appears to be motivated by the fact the state is not ignoring your interests as much as it is ignoring all of the maligned groups cited above.

by moa man | 31st Jan 12, 9:59am 1327957154

Continuing to pour taxpayers funds into that bottomless trough aka The Waitangi Tribunial.

by moa man | 31st Jan 12, 6:25pm 1327987535

You see Nic, not a few hours after I complained about the Waitangi Tribunial, it is revealed that the Maori Party is going to try and blackmail the Govt over the State Asset Sales. That's what you get when you try and be good guy to everyone.

Key is a weak leader. He needs to go

by Stephen Hulme | 30th Jan 12, 8:32pm 1327908771

@PM

Aside from farms, New Zealand's government bond securities are drawing significant interest from Beijing and other foreign buyers as the small Pacific nation takes advantage of demand for safer assets following the worsening of the European sovereign debt crisis, according to the recently re-elected prime minister.

Mr Key should count himself lucky to be able to correlate the recent sharp rise in the NZD/USD currency pair with NZDMO government debt issuance, since there hasn't been any for the last 2 months.

It is more a matter of USD sales versus the 'Kiwi' based on the prediction that FED QE3 will materialise.

As for printing or not - every government 'promise to pay' that gets newly created, then monetised and circulated as money thereafter diminishes the purchasing power of current holders of this same store of wealth. It just gets doubly debased when the Central Bank undertakes permanent purchases of those same promises to pay in return for bank credits created out of thin air.

But let's not forget - the settlement of NZ government debt securities purchased at tender by foreign owners will surely be settled with the drawdown of NZD credit lines created at one of the big four Australian owned banks on behalf of the buyers foreign bank.

All NZD are created in NZ as USD are in the US.

It's just that in our case the credit wrapping for the printing of this fresh money is undertaken by foreigners.

by economist | 30th Jan 12, 8:53pm 1327909998

"Those who create and issue money and credit direct the policies of government and hold in the hollow of their hands the destiny of the people." Rt. Hon. Reginald McKenna, former Chancellor of the Exchequer, England.

by moa man | 30th Jan 12, 9:17pm 1327911448

NZ Says: Wish Key would go away.

by Nic the NZer | 31st Jan 12, 1:07am 1327925233

Thats the same thing Greece said about George Papandreou, but since then there has been a massive swing in opinion of Lucas Papademos their new PM.

"Papademos’ approval ratings have dropped dramatically - from the over 60 percent he enjoyed in the period of hopeful euphoria when he took office - to 39 percent. That is because hope is fading that he can ease the burden on the middle class in the new memorandum, and because of his government’s failure to make even small progress on key issues that might establish a sense of social justice."

What makes you think the alternatives will be any better, or that the PM can make a difference?

by John B | 30th Jan 12, 9:29pm 1327912142

Crystal ball.

In 10 years time, the exchange rate has virtually destroyed New Zealand manufacturing exports, shrinking them to niche product levels.

Factory farming is now the norm, supported and encouraged by the new Chinese owners of vast swathes of New Zealand productive land.

Tourism is now primarily limited to the Asian market (average in-country duration: 5 days, with tourists staying in hostels owned and operated by overseas interests. In-country spend is less than $500, the majority of which is on imported souvenirs made by the very people buying them). American and European tourism has dwindled to negligible proportions as a result of the enduring recessionary/near-Depression aftermath of the 2014 Euro zone crisis combined with a crippling exchange rate and the (understandable) failure of the NZ Government to live up to the "Clean Green" promotion image.

by Gummy Bear Hero | 30th Jan 12, 9:58pm 1327913897

Are you related to Bernard Hickey ? ....

............ or just a dedicated follower ?

by Chairman Moa | 31st Jan 12, 12:06am 1327921567

He's Bernard Hickey's evil twin!

by michael | 31st Jan 12, 3:37am 1327934254

Just out of the oven:FITCH places four major Australian banks on negative watch after the banks showed significantly weaker profiles than some of their peers. In Dailyfx.

by Wolly | 31st Jan 12, 5:35am 1327941347

Some hairy stuff above....face facts folks...this economy is in a bloody mess because silly Kiwi has been happy to vote into office loons for so long...for decades. And you think one more bunch of loons, who say they can sort it out..can do so in 4 years......40 years if you are lucky.

Even without the chch events and the failed govt rotting building regulation fiasco...the borrowing would have taken place..Cullen ,managed it down but allowed the private sector to bubble into the madness we have today. The banks own the residential and farm sectors end of bloody story. The govt and RBNZ exist to protect those bubbles.

"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" Key left out one very important word..."slow"....guess where it fits!

The factor to fit into the brain is whether the economy can finance the existing govt and private levels of debt when the recession looks set to be getting deeper and certainly is set to last longer....I think the answer is a very loud "NO".

I think Key knows this. I think he has started to move his "prudent steps" along at a faster pace....I think he missed the boat and should have put his foot down three years ago.

As for the rest...it's all total BS for peasant consumption. Encouraging saving...joke of the century....working groups=fodder for flunkies ...salaries and bonuses for senior state servants in the Sir Humphrey club=never at risk......Parliament= utter farce......

Meanwhile Sweden has gone on to recover from too much debt in record time because in Sweden the people boot out the idiot politicians and vote in people who understand what the word "prudent" really means.

by steven | 31st Jan 12, 7:45am 1327949137

Funny thing but I think you are right but probably for the wrong reaons...

40 years, yes it will never be sorted....there isnt the energy.

regards

by Wolly | 31st Jan 12, 7:51am 1327949465

Not enough energy and certainly no incentive on the part of the fools we elect....I see the cost of power is predicted to be rising 1% above the debasement of the currency (inflation) for the next 18 years....aaaaaaaaahahahaaahaaaaa .....what a joke.

by steven | 31st Jan 12, 9:31am 1327955494

We produce only 65% electricity via renewables and we are hell bent on selling the SOE's off....only 1%? yeah right.......we pay about 20cents a kwh.....I think 40cents is easily possible inside this decade maybe inside 5 years (inflation adjusted).

regards

by skudiv | 31st Jan 12, 10:01am 1327957299

Where is the deflation going to hit? Is it just core wasteful personel consumption ex. food and energy?

by moa man | 31st Jan 12, 8:46am 1327952806

Nothing a stonking big nuclear plant can't fix Steven. Build it near Aukland where the demand is. Added bonus is, if it does go pearshaped, the location will mean nothing of value will be lost.

by Wolly | 31st Jan 12, 8:49am 1327952991

I'm with you Moa man...they should plonk one on that volcanic cowpat island to the east...

by powerdownkiwi | 31st Jan 12, 9:04am 1327953878

http://physics.ucsd.edu/do-the-math/2012/01/nuclear-options/

So how much uranium resource exists in the world? The World Nuclear Association puts the number at about 5.4 million tons of ore (4.6 t U). At present rates of use and no more exploration, this suggests 80 years of resource. But nuclear is just 6% of global energy production. In the spirit of stacking each energy resource up against our total demand—as I have done for solar, wind, tidal, hydroelectric, etc.—the implication is that we would deplete our resource in a mere 6 years if we required conventional nuclear power to be our sole source of energy!

by Plutocracy | 31st Jan 12, 11:07am 1327961258

I'm looking forward to his take on fusion! From my own understanding it seems very improbable that we will achieve 'cold fusion' given the pressures needed.

However, the noise surrounding Rossi and the E-cat/LENR has been gathering this past year. I'm still not convinced, but hopefully by the end of the year we will know for sure.

If Rossi's E-cat is a dud then I have no doubt your views will most likely eventuate, however, if LENR is viable and can be commercially applied then the 'party' may just go on a little longer.

by steven | 31st Jan 12, 9:57am 1327957071

LOL.....store the waste there as well.....whats a bit more.

regards

by MortgageBelt | 31st Jan 12, 8:12am 1327950723

Time to cut the OCR & get the exchange rate down .... but John says no (frontfooting it) ... & Alan is cautious on that one.

Notice how the householders savings on lower mortgage costs are now eaten up by their rising house etc insurance?...

by Wolly | 31st Jan 12, 8:15am 1327950945

And notice how households have abandoned dreams of owning new houses...now it's all about renting and taking the supplement to feed the landlord who feeds the bank...and who pays for the supplement in the long run..why the households do of course...not the banks!

by MortgageBelt | 31st Jan 12, 8:51am 1327953091

I blame doomsayers @ interest.co.nz for discouraging would-be home-owners over the last 3 years. They could be 3/20ths towards paying off their homes by now.....

by SimonP | 31st Jan 12, 9:18am 1327954716

instead of being debt free and smug in the knowledge that outside of cental Auckland house prices are steadily dropping :-)

by MortgageBelt | 31st Jan 12, 9:34am 1327955656

Lining up for rentals - but all gone ... Too many Renters not enough homeowners...

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10782303

by KH | 31st Jan 12, 9:59am 1327957199

A one cent transaction tax on currency trades probably would not raise much money. Because the huge volume of speculative trading would disappear. And that would be a good thing.

by John L Walley | 31st Jan 12, 11:37am 1327963065

See:

http://www.johnwalley.co.nz/169-accountability_needed_on_poor_.aspx

by neco | 1st Feb 12, 10:13am 1328044437

Thank you for the very astute comment ostrich. With regard to "I have no doubt when liquidity is withdrawn from this market that both currencies will unwind rapidly" would you care to predict a timeframe for "when" and what in particular is most likely to precipitate this liquidity withdrawal?