Surging kiwi dollar hits post-float high against the British pound

Clicking through your chart you can see that the NZD has spiked up against ALL of the currencies listed in the last week or so. So much for that tired old argument "it's not NZD strength, it's XXX currency weakness". So are our economic fundamentals so good that NZD strength is justified?  Hardly, ALL of the countries listed had better Q2 growth than us.

It's speculation of course, but why the NZD? Because of our ultra-orthodox monetary policy and a puppet-to-the-markets  RBNZ governor who is quite happy to preside over the de-diversification of our productive sector and make sure we remain a low wage farm & theme park economy.

Bollard, WHY HAVE YOU GONE AWOL ON THIS???

From the Economist

Free money, come and get it

Nov 5th 2010, 9:24 by Buttonwood

WELL, I was wrong. I thought that, markets being at least mildly efficient, they would have discounted the Federal Reserve's latest round of QE. The Dow was up more than 200 points yesterday, dragging European markets with it; several commodities rose to two-year highs; and gold was close to its peak. In the bond market, the yields fell in the 7-to-10 year part of the curve, where Fed buying will be concentrated.

The bad news was confined to the 30-year bond, where the yield rose to more than 4% (an entirely understandable reaction) and to the dollar which dropped to its lowest trade-weighted level this year. I say "bad news" but of course US exporters will regard it as good news. if you are a foreign creditor of the US, or a competitor in export markets, you will be less pleased.

The FT carries a story today, covering the complaints of the rest of the world including this quote from a newspaper run by the Chinese central bank:

As long as the world exercises no restraint in issuing global currencies such as the dollar - and this is not easy - then the occurrence of another crisis is inevitable, as quite a few wise westerners lament.

A Chinese official has also suggested that QE, rather than current account targets, should be on the agenda for next week's G20 meeting, a sign that little positive will emerge from that shindig.

The Americans may say that dollar depreciation is a side-effect, not the main aim, of QE. But, given that the laws of suppy and demand have not been repealed, it is hard to see how one can imagine that creating a lot more dollars will do anything but drive down the price.

As the value of the world's reserve currency falls, it should not be too surprising, I suppose, that other assets rise in price. The Fed is handing out free money so why not buy something tangible with it? And the wealth effect, by boosting asset prices and thus confidence, is one way that optimists argue QE will work.

I still struggle to understand how creating more claims on wealth adds to wealth itself, as if slicing a pizza into eight not four pieces creates more food. To me, this is all very reminiscent of the schemes of John Law and the south sea bubble, which worked for a time, but only for a time. Lots of things can go wrong. If the dollar keeps falling, why would foreign creditors keep accepting low yields on Treasury bonds, a money-losing proposition? If commodities rise, won't that act as a tax increase for western consumers? What will happen to Europe, where the peripheral countries are struggling, money market rates are rising, and the currency is up to $1.42? But maybe I will be wrong again.

It is certainly not our high interest rates! It is because we still have a good story to tell. We are fiscally conservative, our economy is the "least ugly" compared to many in the world.

Also I believe there is a lot of money coming in to pay out the insurance company claims from the Canterbury earthquake. The NZD/AUD rallied 2 cents the day before the RBA raised Australian interest rates. That did not make sense. Maybe a large Australian insurer bought NZDs to reimburse their NZ insurance branch. The sums involved are in the billions (think of all the damage in CHCH and all the private claims resulting) and that could account for the gains over the last few weeks. There will be more to come from London insurers as well, so that could also explain the NZD/GBP rise.

We make food and export it to Asia, a strongly growing marketplace. 60% of our exports are commodity driven and even in NZD terms are at 7 year highs. 30% of our exports go to Australia, a booming economy. You don't hear AUD exporters complaining!

So, looking at US exports if you take out commodity exports you are left with a smaller number. Korea, Taiwan, Malaysia, etc etc all have stronger currencies as the USD weakens against them. So exporters to those countries can put the prices up as they have a stronger domestic currency to compensate. It is those non commodity exporters to the USA that will suffer. According to the stats about 11% of our export trade flows. But frankly they are under extreme pressure anyway. The US does not want their products, as they are battling trade imbalances. Unless you are in a niche market, there will be no demand anyway as the US consumer and the US government is strapped for cash.

The NZD/USD will test the 0.8200 highs and make new post float highs. It may even see the 0.9000 region. It is a good thing for NZ, and it reflects the reality of today's marketplace.

Any kind of war are explainable in a few words:   

A few stupid people on top of important countries making the wrong decisions again and again and the public/ media listening - watching - supporting and admiring them.

 We are running after the wrong principles in life.

We are just one of the better bets in a very sick western world...think you've got it bad, try being middle class at the moment in the US, UK or parts of europe. In that environment we have to expect a higher Kiwi, and why blame Bollard for that when in fact it could be argued that he's taking real risks in keeping Kiwi interest rates as low as he is.....what drives NZ out of recessions is ALWAYS export lead growth and higher commodity prices.

A high currency is a positive sign for a country, even for a commodity producer like NZ if the USD commodity prices are also high (which they are) because of a weak USD. NZ is experiencing record terms of trade, but quite rightly the consumer is deleveredging and the flow on effect for spending and retailers will not be seen for some time yet. But that is what has to happen, it is good news, and barring another global melt down that can never be ruled out, we shouldn't be so damn negative all the time 
 

Neco, frankly you have no idea - yes, even the biggest dog of the lot, the US, had annualised growth of 2% last quarter , but the market still buys NZDs. The question you should be asking yourself is whether US growth rates will out perform NZ's over the next few months/quarters/years.  Markets look AHEAD at an economy's prospects, growth rates, and future interest rates, future returns on their money invested.

Of course FX markets do not buy currencies based upon who's got a better middle class, it was a used as an indication as to how bad or otherwise it is in both economies, and who will expereince the stronger growth in the future...ours won't be massive, but its a easy bet that it will be higher than theirs i.e. the other country involved in the rate you're so focused upon.

What;s the fair weight? ...and how do you know?

Finally it all comes back to productivity – we aren’t just productive enough. The current international environment and its consequences make exporting of our major earner agriculture and other exporters unbalanced with the risk of too many fluctuations. This could become a further problem for our economy.

 For years I’m advocating to reduction of quality imports in order to stop our growing account deficit. As I described many times planning, designing, manufacturing and maintaining our infrastructure needs right here in NZ. Adding more quality segments to our secondary economy sector is essential. This would have  a number significant advantages for our economy.

I agree Nicholas, we don't, but let me assure you that  I fully understand the mentality of FX traders. And in the short term, the very short term, that might make them money...talking seconds/minutes here. Longer-term Kiwi Trader is dead right. Besides, its not "Fx traders" that determine where the NZ Dollar goes, its the likes of global funds managers, and shorter-term, hedge funds.

What people are forgetting I think is that with debt to GDP here at less than  30%, compared to US,UK and most european countries at 90 - 120%, NZ is in a far stronger position for future growth..yes, we have high private debt but it looks like individuals are trying to do something about that hence the retail pain. It means that we don't need to start printing money for the sake of it, but if the likes of one or two of the bloggers here think that would be a good thing for us to do to cap the NZD, they have NO idea of the folly and risks asscoiated with that rare practice....the other countries doing this would not for one moment contemplate doing so unless they weren't so far up a creek without a paddle...take interest rates to zero, borrow a trillion to bail out and provide stimulus, no effect, what next ?  in desperation, you print money and hope...it has never been a successful strategy or why not do it every day ? NZ is a gaint in comparison at the moment

No, you're right, private and public it's closer to 200% and that's our vunerability. But we are no way as vunerable as the other countries mentioned. If you're requesting zero interest rates understand that you're asking for interest rates less than the rate of inflation - you are stating that we're really stuffed when you ask for that... Youre demanding the massive speculative activity that comes with that, and which is going to wreak havoc with those other economies that are heading down that route without other choices ...we are not there yet, and may not be ...you go there as a LAST resort

Sorry, to clarify, public debt is the focus at the moment in terms of currency I suspect, but public and private dent impacts us through the cost of funds that our banks have to pay for funds, and therefore have to pass onto borrowers...it's not insignificant

Sorry, to clarify, public debt is the focus at the moment in terms of currency I suspect, but public and private dent impacts us through the cost of funds that our banks have to pay for funds, and therefore have to pass onto borrowers...it's not insignificant

There can be no argument as to whether a strong NZD is good or bad for NZ with respect to the tourism sector - and tourism has just surpassed dairy in terms of foreign exchange earnings;

The Tourism Industry Association New Zealand (TIA) says new government figures released today show that tourism has outstripped the dairy sector as New Zealand’s top export industry. 

http://www.tianz.org.nz/main/news-detail/index.cfm/articleId/786/ 

We need to bear in mind most of these bookings were made when the NZD was around .55 - .65 to the USD.  I suspect forward bookings will take to the cliff pretty soon because of the double whammy of commodity (oil) prices rises.

This is aside from Aussies of course - and admittedly they are a large part of our market.  On that front homeowners are looking down the barrel of higher interest rates on mortgage borrowings... might serve to somewhat slow trips across the Tasman.  Additionally, given the high Aussie dollar, them heading to the "basket case" Western regions becomes a very attractive alternate to NZ.

Yes Kate, it's a reflection of more quantqtive easings from the US that NZ can do little about - this is a problem for all the non currency printing economies and will eventually end up in extreme pressure on the US and their continuing fall as the major economy of the world - it will take a fair while but they are currently ensuring it will happen

I think many people here are mixing up the terms “Central Planning Model” and “Mixed Economy Model”

I’m against central planning as long as free markets are working for the private sector. Of some reasons any involvement of the government in business activities seems a nightmare in this country (see eg. NZMEA Les Rudd and John Wally)

 Here the philosophy of “Mixed Economy Model” from Wikipedia:

The term mixed economy is used to describe economic systems which stray from the ideals of either the market, or various planned economies, and "mix" with elements of each other. As most political-economic ideologies are defined in an idealized sense, what is described rarely if ever exists in practice. Most would not consider it unreasonable to label an economy that, while not being a perfect representation, very closely resembles an ideal by applying the rubric that denominates that ideal. However, when a system in question diverges to a significant extent from an idealized economic model or ideology, the task of identifying it can become problems. Hence, the term "mixed economy" was coined. As it is unlikely that an economy will contain a perfectly even mix, mixed economies are usually noted as being skewed towards either private ownership or public ownership, toward capitalism or socialism, or toward a market economy or command economy in varying degrees.^[10]

 In the current severe worldwide economic situation where exporters/ tourism are struggling a good working co- operation from the Private Sector with the Government is of high value.

 An almost ideal model for NZ:

 Dirigisme is an economic policy initiated under Charles de Gaulle of France designating an economy where the government exerts strong directive influence. It involved state control of a minority of the industry, such as transportation, energy and telecommunication infrastructures, as well as various incentives for private corporations to merge or engage in certain projects. Under its influence France experienced what is called "Thirty Glorious Years" of profound economic growth.

 Our government should be obligated to assign, when ever possible all orders to NZcompanies (manufacturers).

 Energy, Public Transport, Telecommunication

 Two examples of how we should proceed with infrastructure needs in Energy and other such as Public Transport:

Financially and economically it doesn’t make sense to import or to produce heavy and expensive machinery/ equipment like turbines/ generators, nuclear power plants or heavy trains.

Such imports are mostly under overseas contracts, managed and installed by overseas technicians and workers, without hardy any local workforce especially skilled ones.

In stead we should research, develop and produce –SMALLER UNITS- manufactured and installed by Kiwis in our own country.

Sustainable Public Transport - developing a sector of industry to cover public mobility within a 100- 150km radius. Innovative businesses producing SMALL QUALITY UNITS starting from bikes, scoters, light rail systems and the interaction within, hardly seen in other countries. All planned, developed, installed, maintained and ran by Kiwis.

Sustainable Power supply/ savers SMALLER QUALITY UNITS developed, produced, locally/ regional installed and ran/ maintained by Kiwis.

 - increase employment opportunity -
- better education after school –

-  technical skill and knowledge improvements -
- higher wages/ imports of brainpower –
-  positive influence to other sectors/ fields such as Science and Research -

- less quality imports / reduction of account deficit -
- control and sovereignty –

- quality infrastructure services –

- national security improvement –

- almost no affects caused by natural events –

  The list of advantages is almost endless.

Conclusion:

Finally it all comes back to productivity – we aren’t just productive enough. The current international environment and its consequences make life for our 2 major earners agriculture/ tourism tough. We need a balanced economy to minimise the risk of too many fluctuations – adding new solid segments in our secondary sector is a clever solution avoiding that.

Bernhard can you make the article I wrote above and the comment here with the 2 links  public please:

For Mr. Joyce Mr. Brownlee - and other people interested in New Zealand making real progress - with real productivity - in the real economy:

 http://en.wikipedia.org/wiki/Mixed_economy       ->      http://en.wikipedia.org/wiki/Dirigisme

I think it is now time to stop endless discussions and take practical actions. In the most difficult, fast changing time with many uncertainties on international financial, economic, political, social and environmental front, my proposals are a brilliant addition to help our economy.

We also need a national education program, which is dedicated to make to public aware how important production is for NZ.

When asset values inflate to the extent ours have - principally real estate, which is then used to leverage credit to buy even more, then a correction is inevitable.  The pain is necessary and entirely predictable.

A high NZ dollar will enable private and public debtors to reduce debt (if they are smart enough to cash in their chips and walk away from the borrowing table) significantly.  Housing and commercial properties will be subject to price corrections that place them within the budgets of middle-class purchasers.  Savers will benefit from a steady yield on their savings as they reduce household debt loads. 

The downside is a hit on exports, but this will be greatly mitigated by what is happening globally.  On the upside - emerging markets will have stronger purchasing power and that shows up rather quickly in their food choices.   Adding dairy and meat protein to their diets is an inevitable consequence.  As major  western economies slash government spending to balance the loss of tax revenue and service their massive debt loads, huge subsidies to european and american farmers will face cuts:  this will make NZ exports more competitive. 

It is also obvious that Bernanke's plan is to inflate away American debt by diluting the value of US dollars.  One of his intended consequences is to drive up equity prices on US exchanges, but overseas investors will be looking to hedge against a collapse of the dollar and stocks by purchasing safe and hard overseas assets.  These investors will be looking hard at places like New Zealand to park their assets.  Those kiwi farmers who are not profitable will at least be able to liquidate and begin again.

Look - this is going to end badly for everyone, but a damn sight worse for major economies.  Bollard and Key know what they are doing.  If they can resist reacting to the volume of criticism from the more volatile parts of our economy and keep a steady hand to their course, New Zealand could well enter the next decade with a balanced economy that will be the envy of the world. 

The party had to end sometime - some over-indulged.   The hangover is coming, but we are at a crossroad where we can either suffer through it, or open another bit of bubbly so we feel better, only to end up in detox and IMF rehab.

Steady, boys, steady.
 

Nice one Doug...you must write children's bedtime stories for a living!

Neither Bollard nor Key or English have a clue what the hell is coming down the track.

  Joe kiwi owes big time! dollar goes up UP UP!! Joe dont owe so much money anymore..national debt down...that side of the equasion dosnt look bad to me.I just cant see the dollar going down in the new environment..you have to ask why is all the Big money buying land wherever it can ..not gold Land! because food is the new gold, a consumable..who's sales keep repeating, year in year out... it just cant get any better fo NZ.The worse it gets out there..the better it gets for NZ.

 We were the only country to come out of the second world war in the Black..As these Scenarios are repeating,I doubt New Zealand could go wrong if it tried.

Obama said he wants to double the ammount of exports in the next two years... now you wonder how.  Improving the value of foreign currencies will pull the US of A's exports to the next level. .. all kinds of exports.

Hope you don't get to taste Made in the USA yoghurt or Texan "oisters".

I dreamt last night that the Govt. legislated to change our name to New Weimarland...was it a dream...or was it a flashback to earlier times..who knows ?

"Although the inflation ended with the introduction of the Rentenmark and the Weimar Republic continued for a decade afterwards, hyperinflation is widely believed to have contributed to the Nazi takeover of Germany and Adolf Hitler's rise to power. Adolf Hitler himself in his book, Mein Kampf, makes many references to the German debt and the negative consequences that brought about the inevitability of National Socialism. The inflation also raised doubts about the competence of liberal institutions, especially amongst a middle class who had held cash savings and bonds. It also produced resentment of Germany's bankers and speculators, many of them Jewish, whom the government and press blamed for the inflation.^[15]The Germans called the hyperinflated Weimar banknotes Jew Confetti. ^[16]

Additionally, later German monetary policy shows far greater concern for maintaining a sound currency, a concern that even affects Germany's present attitude in eurozone debates concerning bailouts of failing national economies today.^[17] Incidentally, the hyperinflated, worthless Marks became widely collected abroad. The Los Angeles Times estimated in 1924 that more of the decommissioned notes were spread about the United States than existed in Germany.^[18] "

Now is a most exciting time.

In the industry I work, wood products and forestry, there has been low profitability for many years.But now is crunch time as we must raise our USD prices to stay in business.our customer in the Usa doesn't have an option if he wants to stay in business- he needs the goods. Ok, he can buy from chile but their peso is strengthening also, so they have to raise prices to stay in business.

Or he cay buy from china but the raw material will have to cost more soon if he is to pay the kiwi sawmill or log trader.

Or can produce himself but doesn't have our high quality knot free pine.

The trick is making sure we can survive a scrap.who has the strongest honest balance sheet wins.last man standing.goodwill won't pay the bills.( tenon have $ 67M) bet they wish it was cash ;)

and it's summer, come on kiwis

It's time for the many well run private companies, many quietly run by honest hardworking famalies to win.

Fuck off bankers and the corporate billing machine.

Our grandfathers ran across Tobruk with 303,s for our freedom and our grandmothers hearts. They taught us to fish and love with Maoris.

We'll be fine!

Now is a most exciting time.

In the industry I work, wood products and forestry, there has been low profitability for many years.But now is crunch time as we must raise our USD prices to stay in business.our customer in the Usa doesn't have an option if he wants to stay in business- he needs the goods. Ok, he can buy from chile but their peso is strengthening also, so they have to raise prices to stay in business.

Or he cay buy from china but the raw material will have to cost more soon if he is to pay the kiwi sawmill or log trader.

Or can produce himself but doesn't have our high quality knot free pine.

The trick is making sure we can survive a scrap.who has the strongest honest balance sheet wins.last man standing.goodwill won't pay the bills.( tenon have $ 67M) bet they wish it was cash ;)

and it's summer, come on kiwis

It's time for the many well run private companies, many quietly run by honest hardworking famalies to win.

Fuck off bankers and the corporate billing machine.

Our grandfathers ran across Tobruk with 303,s for our freedom and our grandmothers hearts. They taught us to fish and love with Maoris.

We'll be fine!

Bit of hemp in that forest?

Your weekend is my everyday..... :)

Commodity prices reflect the inability to supply demand. At this point, for the first (but entirely predictable) time, we are globally up against the absolute limits. The old 'rules' of lack of supply increasing price until a financially-viable alternative costs itself in, don't apply in absolute scarcity.

Which means that timber (I've got a forest as it happens) is better held onto, than sold. It's not a question of money, it's a question of having a resource.

Have a wee google of 'the export land model'. and Prof Albert Bartlett on the exponential function, then google ERoEI.

Enjoy.....

There is a lot of comments on this post that seem to vary from the fact. Re NZ debt. From the Stats web site "Net international liabilities were $163.7 billion (86.5 percent of GDP) at 30 June 2010"

This is the link to the details-

http://stats.govt.nz/browse_for_stats/economic_indicators/balance_of_pa…

Then open the excel spreadsheet.

Balance of Payments and International Investment Position: June 2010 quarter – Tables. 

Table 10 shows gross overseas liabilities of $307,935m but table 12 shows that $119,675m is in NZD so repayment can be in NZD's. It also show the biggest amount in foreign currency is USD77,480m, which is getting less in NZD every day!

For all those cheering the NZD hipe I give you this  press release appeared today in Bloomberg

http://www.bloomberg.com/news/2010-11-07/swan-says-strong-currency-cuts-tax-forecasts-as-exporter-earnings-erode.html 

Hope that this will help.

Come on John...the Poms are leading the way boy:

 "The feckless unemployed will be forced to take part in a punishing U.S.-style ‘workfare’ scheme involving gardening, clearing litter and other menial tasks for just £1 an hour in a new crackdown on scroungers.

And if they fail to turn up on time or work hard they will be stripped of their dole for three months.

Work and Pensions Secretary Iain Duncan Smith will tomorrow unveil ‘compulsory community placements’ in an attempt to stop people living on benefits for years without bothering to look for work." mail online

 "ONLY DAYS after being elected, some Auckland "super city" councillors are already calling for more pay.

Several councillors have told the Star-Times their salaries have been set too low by people who "do not understand our job", and called for a "good quality review".

Local Government Minister Rodney Hide rubbished the request, saying that if councillors didn't like the pay they shouldn't have stood, since salaries were announced three months before the election." sunday star

Ten marks for Rodney....now off you go and deal with the gargantuan bloated civil service and SOE salaries Rodney...you know bloody well which ones...!