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Finance Minister English frustrated by talk about NZ$; Says credit rating agencies say it's too high, while some are viewing it as safe haven; Eyes global deflation

Finance Minister English frustrated by talk about NZ$; Says credit rating agencies say it's too high, while some are viewing it as safe haven; Eyes global deflation

By Alex Tarrant

Finance Minister Bill English says he is frustrated with market talk about the level of the New Zealand dollar, having been told by credit rating agencies the currency is overvalued, while others in financial markets say it is increasingly looking like a safe haven investment.

English also said he thought deflation posed a bigger risk globally than inflation over coming years.

Speaking to the Federated Farmers' AGM in Auckland on Thursday, English said Reserve Bank legislation was unlikely to affect the level of the New Zealand dollar as currency markets were being influenced by larger economies like the US.

He said the Reserve Bank's targets were unlikely to change when new Governor Graeme Wheeler was appointed in September, other than possibly including more reference to controlling rapid credit growth, something Reserve Bank Assistant Governor John McDermott last week said the Bank was looking at.

However, rapid credit growth was the story of the last decade, he said. The focus had now shifted to making the New Zealand economy more competitive and productive as a way of dealing with a persistently high New Zealand dollar. English praised exporters for their "impressive" ability to deal with the high currency over the last few years.

He reiterated the Government wished to return its books to surplus in the 2014/15 year.

Frustrated by NZ$ talk

“I can be, one day, meeting with credit rating agencies who say to me, 'New Zealand has these very high levels of debt to foreigners, that’s a big vulnerability, you’re in danger of a sudden stop where the market just stops lending to you, and therefore your credit risk is higher than we would like to see it'," English said.

“Then on the other hand, the next day you’re talking to someone in the investment markets who’s saying, 'New Zealand looks like a bit of a safe haven, who knows what could happen with these other currencies'," he said.

“If you listen to the credit rating agencies, the currency should be going down to the level that fixes these long-run imbalances - the big current account deficit, or a larger-than-ideal current account deficit. And if you listen to the markets, they’re saying, 'you’re looking a safer bet month by month.' Well, one of them is wrong, because they’re giving me opposite stories.

“I think that just shows the kind of confusion you’ve got in global markets, not just about us, but about other currencies like the yen, which has been consistently strong even though Japan has got the worst public debt in the developed world by quite a long way," English said.

“So I don’t know what to make of it.”

English said he did not think different Reserve Bank legislation would have any effect on the currency.

"We just appointed a new Reserve Bank Governor. There’s unlikely to be much change in the [policy targets agreement] framework or the Reserve Bank, other than that they are spending time trying to understand how to control fast credit growth," English said.

“But even then that’s a bit of the last war. Credit growth in 2007 was something like 16% growth in borrowing in New Zealand. Well at the moment it’s zero or one percent – it’s creeping up. So we don’t see much change in it," he said.

“Our problems over the next couple of years, at least globally, are going to be more likely deflation than inflation. Deflation’s probably more to be feared than inflation."

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20 Comments

Even in the weird world we live in the NZD is not a safe haven. If anything it is a  speculative plaything. Currencies, commodities have all either partially or fully decoupled from real world supply and demand. Making it harder and harder for real world companies.
Credit ratings agencies have been shown to be acting immorally, illegally and simply just badly in markets right around the world. Google any of them and you find problem after problem. Why we have to waste our time on them is one of the strange elements of this weird world.
When Bill goes to a foreign nbank to borrow NZD - wher do they get the money from do you think? Do banks in Japan have socks full of NZDs- don't think so.
The thing about the NZD that always stuck with me is that it is highly traded but you cannot buy anything with it outside NZ. So people outside of NZ simply can't have draws full of the stuff can they.

The thing about the NZD that always stuck with me is that it is highly traded but you cannot buy anything with it outside NZ. So people outside of NZ simply can't have draws (sic) full of the stuff can they.
 
No, they just have drawers full of it here, sitting on depo looking for a more permanent home, since we keep selling the stuff to buy Yen and Aussie to swap for imported cars, TVs and transfer profits offshore etc.  
 
It's that store of kiwi dollars that will end up buying out Fonterra, the mixed ownership companies and anything else that's not nailed down. How else to permanently satisfy the currrent A/C deficit.

English for once makes a couple of good points; but misses a couple of other key ones.
He knows full well the $NZ is overvalued; and its good to see him acknowledging it for a change. The supposed safe haven people by defnition are speculators- they are betting that the dollar will continue to stay high; and self fulfillingly make that happen. The ratings agencies at least argue on fundamentals, which is where English should be. He also notes correctly that credit growth is for now at least a problem of the past; and so bad inflation is nowhere on the horizon.
Where in my opinion he is wrong:
Lowering the $NZ, if that is what we choose to do, (and we should to fix the current account) is very much within our control; and the costs of resisting that lowering by foreigners would be to them. (They would have to buy high; and risk selling low, if we printed more). Simplistically it is easy enough to print more $NZ, as the US, UK, the Swiss, the Chinese and Japanese have done with their currencies. It would be easier for us, in that the world would largely ignore us. China has to react to the US, and vice versa; but neither has to react to NZ. 
Raising your currency is more difficult if traders bet against you- see Soros and the UK.
A second minor point: He confuses government debt yet again with the current account in the case of Japan. They had a current account surplus of $125 billion in the year to March, even after earthquake and GFC problems. Their currency should keep appreciating; but they won't let it- they print more to stop it. Their government deficit should be almost irrelevant in the strength of the currency.
You sense that he sort of understands the difference between the deficits it if he thinks about them; but can't help himself to focus only on the government deficit (and not all that well at that, as it happens), when the current account one is far more important- as the rating agencies and IMF are telling him. Ironically fixing the current account first may well help with the government deficit. The other way round clearly does not work.
 

English praised exporters for their "impressive" ability to deal with the high currency over the last few years.
Are you taking the piss Billy Bob...? no I mean are ..YOU...taking the piss...?, because if your not ,your an imbecile ,unfit for the finance portfolio......what a stupid comment, you really need to get out more Billy because a ton of Small MFG Exporters have gone to the wall during Bolly's reign of  lets do nothing......to the wall Billy ...tits up...not trading...kaputski. Whack job..!
On the one hand the credit rating agencies, you forgot to mention the IMF tell you it's overvalued, on the other hand Market forces as in John Boy tell you it's not, you dopey S.O.B, why don't you just say your boss, when you mean your boss.?
Safe haven...?...aside from being a great lttle pairing for profit taking on the forex markets, you know full bloody well your laundering communist cash through every intake vent you can provide....., you little ferret.
Damn doesn't anybody question anything these two clowns trot out, is it all just reporting  verbatim  drivel now.......The Media in general should now recognise that these boys think your dumb...financially illiterate....and they can tell you just about anything they want.
Hell even Brownlee thinks your all stupid, how bad is that...?
 
 

Attaboy. Beaudy. A good-old one-two uppercut.
 
In the past two weeks Billbo made two announcements 1 day apart that went unchallenged
 
(a) Talking about how the tradeable and non-tradeable sectors had not come back towards one-another as he had expected. REALLY? Expected?. When you look at the graph they have actually diverged further apart, on his watch, under his reign, which leads to the question, what did he do that caused that to happen. Nobody asked, but if you think about it, it must have been obvious at some point that was happening, it was getting worse and required some action on his part. There must have been some plan-of-action that caused that savage deterioration. It didnt happen by accident. Talk about being dumb. But why the silence?
 
(b) During Billbo's Current Account Deficit Tarrant interview he referred to a PLAN and a TARGET a number of times. (a) the plan wasnt working and (b) the target wasnt being met. Not one-person asked him "what plan"? and "what target" and "what action-plan had been implemented" to achieve the target. Just total silence.
 
Key and English have realised that they can spout utter nonsense one day and its forgotten the next, and get away with it.

Cheers Iconoclast...I got so upset with this piece of political garbage , I guess I just sucked up all that frustration Billy Bob says he feels and spat it in his mash.....because thats what we are being fed .....with a good dose of contempt for any sort of intelligence.......I think Gibber nailed it with ...Yah.! 

Jeez...Christov...I thought I could rant........but I take my hat off to you...
Sheer poetry.
Sheer brilliance...
Try a little Caps-Lock next time....if I may be so bold.
You will feel a little richer for the experience.  Burnhard pays extra attention for more attention to detail.
He is up 5 fold in readership....so must be something you said.
 
 
 
 

Alter Ego.....many thanks but I'm not even n your or SoreL's  park when it comes to a solid rant.......keep doing what you do, I like it, I like it a lot.
Stay Well.

" I dont know what to make of it"
well i will sleep well tonight with that comment from our finance boss!!! 

If proof were ever needed that English is totally out of his depth, then this article proves it beyond any doubt.
 
Nuff said! 

Hi Basel - care to enlighten us with specifics about what he said that suggests he's out of his depth, otherwise yours seems just a stupid glib comment that's more suited to a much lesser forum...I'm sure its not, but love to see you explain

Let us just start with the time that be has been in charge and that he has shown absolutely no attempt to lower the NZ$ to its real value. Blame the RB but it is still within any Government's ability to change those rules for the times.
Just one small action would have been to match the QE of some of our majortrading partners rather than to try and sit on top of the pile with the Australians who hold many more cards inn their hand. It will be interesting to see how further softening in our trade affects the situation.
Your eyes see the 'stupid glib' bit through the rose tints, I suspect.

It's the first acceptably regulated forex market to open after NY stock market close  - 8am our time in the winter 10am in the summer. Also the first to attack post G? etc meetings in the Northern hemisphere

osterich, I'm not sure what youre suggesting as the alternative to a floating currency ?

The currency does not need to stop floating; just as theGBP, the USD, and the Swiss Franc float, even though their currencies have been managed down by their central banks. 
If for example the Reserve Bank said to our banks that instead of borrowing from $1-2 billion from Switzerland as they did earlier this year; they should borrow new money from the Reserve Bank, then I beleiev the banks would comply. Such a move would give a fairly strong signal to traders in our currency that there was some moderate downside in their doing so; and it would likely slow down fairly quickly. If it did not, repeat step one with existing debt until it does. There is a risk I guess that the sell trade could then become an avalanche, and the $NZ could overshoot on the downside. If it did, we could counter that by actually buying back some of our own assets at relative bargains. But if step 1 is done in a measured and progressive way, there should not be such an avalanche.
Not at least until it is forced on us through a default by not acting with even some urgency.
Happy for the process above to be debated; there may be better ones, but am sure that the assumption that nothing can be done is nonsensical spin.

I totally agree.
Grant A accused me of knocking BE but QE as practiced by the Big  Boys can easily be matched without our head being seen above the parapet. What would have happened if BE had borrowed that $350m each week from the RB rather than from the international market. I suspect that our dollar would now be an encouragement to exporters to create more jobs and so what TVs and petrol would be a little more expensive.
Less dole for BE to pay out and more tax paid by profitable export businesses. Farmers , please note. 

How many extra jobs would our exporters really create?  Why would they be encouraged to create more when their profits would magically increase anyway without the additional cost of labour?  If input costs rise for (petrol, imports) our exporters does the lower dollar impact significantly enough for there to be a net benefit?

meh,
Fair questions, that I understand economists answer with the elasticity of supply and demand. If there was zero elasticity in both, then we might as well have as high a dollar as possible. But of course there is considerable elasticity (that my understanding takes say 3 months to start getting through a J curve while short term plans are amended.)
Big international corporates with plants and office in many places can actually respond pretty quickly to new price signals, by adding shifts in low cost places, and reducing ouput in high cost places. Assuming Australia did not follow us, we would for example have a considerable advantage in food and packaged goods manufacturing for Australasia.
Tourism would take off almost immediately; partly through domestic travellers staying onshore; Aussies finding us competitive again; and the Chinese coming in many more bus loads.
Small businesses would likely find the need for an extra staff or two also fairly quickly; driven by all of the above. 
The IMF estimates that a 20% devaluation, along with their assumed elasticities, would get us to balance in the current account. Their guess is as good as anyones.

Of course the dyed-in-the-wool rednecks can't or won't find it in their brains to accept any possible change that would accept a change for the common good. 
TINA is alive and well within certain groups. Once it was the Left in the form of unions and today it is the Right who want to keep their positions. Change will come. It is only a matter of time.
 

@Stephen L
There is a risk I guess that the sell trade could then become an avalanche, and the $NZ could overshoot on the downside. If it did, we could counter that by actually buying back some of our own assets at relative bargains
 
Utopian dreams have a habit of ending badly.