PM John Key says would not like to see another big US$ devaluation, sees slightly increased risk of tit for tat currency wars

By Alex Tarrant

Prime Minister John Key would not like to see another big devaluation in the US dollar that could hurt New Zealand exporters who traded in the currency, he told reporters in Wellington today.

Meanwhile, Key said he saw a slightly increased risk of retaliatory action between countries in the currency space after a divided G20 meeting that had "disappointed" him.

In other comments, Key said cash coming into the country as a result of quantitative easing in the US could help subdued credit growth in New Zealand, and that he would like to see the NZX stock exchange stay in the country after its CEO Mark Weldon raised concerns about the government's Financial Markets Bill. Furthermore, Key and Biosecurity Minister David Carter said the Kiwifruit PSA problem could ramp up a bill for the government of "some millions" of dollars.

Risk of currency retaliations

“I think there is a slightly increased risk of retaliatory [tit for tat currency] action, less so from the feeling at APEC, but my understanding is things were quite frosty at the G20 in Seoul," Key said at his weekly press conference.

"There’s a lot of stress in the system at the moment, so you could see and feel that tension," he said.

"We raised that issue in the [APEC] leaders’ session, and once we had raised it a number of other leaders came in and exercised their view.

Key said he though on balance that retaliatory action would be "very negative" for the Asia-Pacific region.

"The potential is, if you saw a whole lot of countries either quantitatively easing or doing something else, you could lead to a bout of inflation in the region," he said.

"That could lead to lower growth in the region and the world is relying on the Asia-Pacific region to be the part of the world that takes us out of recession, so I would be very worried about that.

"I think it’s also the speed of change. It’s not the absolute level of your exchange rate, but the speed of change has been quite dramatic. And you certainly wouldn’t want to see another significant leg down in terms of the US dollar against the New Zealand dollar – as in the US [dollar] falling a lot further," he said.

Disappointed by G20

Key said he was a bit disappointed by the outcome of the G20 summit held in Seoul last week.

“What it shows you is it was easy when they agreed what to do, and that was spend more money, because that was politically easier to sell, and was pro-economic growth at that time," Key said.

"What G20’s proving at the moment [is] it’s a lot more fractured when they have differing views on what the right economic prescription is," he said.

Optimistic it won't just be commodity exporters who survive

Asked whether he thought it could just be commodity exporters who come through a period of a high New Zealand dollar, Key said he was "more optimistic than that, but it’s certainly more challenging".

"One thing that is worth remembering is that a big part of our economy and therefore our exports is Australia. So one big advantage we have is a lot of our non-commodity based exporters, they’re exporting to Australia and they’re not suffering from a very high exchange rate, in fact they’re very competitive there," he said.

Key said the government had been making a number of moves trying to take pressure off exporters, through labour market, Resource Management Act and tax reforms.

"There will always be cyclical flows [in the currency], but there’s no question that those [who] are exporting in US dollars, that are non-commodity linked, it’s very difficult to combat a US-New Zealand exchange rate which is overvalued," he said.

Asked then, with the beneficial Australian link and the fact commodity prices were rising faster than the US dollar, whether the whole currency issue was therefore being overblown, Key said there were "a range of significant areas where people are exporting and they’re not commodity linked, and it is in US dollars, so there is concern".

QE2 cash sloshing in could help NZ economic growth

Key was asked about his thoughts on the risk of money printed by the US Federal Reserve, in its second round of Quantitative Easing, flowing into New Zealand, rather than being lent in the US.

[Firstly], inflation’s running at reasonably low levels levels in New Zealand," he said

"Second thing is we haven’t actually seen [credit] growth – that’s been one of the issues technically - taking place in New Zealand. In fact it’s been going the other way in terms of business credit growth, so arguably if a little bit more cash sloshed into New Zealand, that might actually help economic growth."

"But we’re not unhappy with the unbalancing we’re seeing from the private sector, it’s a little painful for the retail sector at the moment, but overall we want New Zealanders to save more," he said.

Not worried about potential for high NZ$ to increase imports

Key was calm when asked whether there was a risk of New Zealanders starting to import more goods with the high NZ dollar against the US dollar.

“Technically a higher exchange rate makes imports more attractive and exports less attractive, so by definition it affects that balance," he said.

"But what’s happening at the moment is New Zealanders aren’t necessarily importing more, what they’re actually doing is consuming less, and so that’s actually making some of their goods and services cheaper, taking the pressure off inflation, so there’s always two sides to that coin."

On Mark Weldon's NZX comments

Meanwhile, in response to comments from NZX CEO Mark Weldon that the stock exchange may have to move overseas if the Financial Markets Bill currently before parliament were passed as is,  Key said it a given that the government wanted the NZX to remain in New Zealand.

"I literally saw his [Weldon's] comments on the plane when I flew back [from APEC in Japan] on Sunday night, and I intend to take that matter up with both him and the minister," he said.

“If there are genuine concerns then we will look at addressing those.”

PSA could cost government millions

In another threat to the government's finances as it looks to cut costs and keep spending tight, Key and Biosecurity Minister David Carter today said the Kiwifruit Psa disease could end up costing the government "some millions of dollars".

“It is not possible to put any figure on this at this stage, but significant resources and considerable support are already being put into the battle against Psa,” Carter said.

The government would like to work toward eradicating the disease, Carter said, although he and Key said authorities were currently looking to contain it. Key noted other countries that had had the disease were not able to eradicate it.

“Obviously eradication of the disease is what we all want and this is certainly not being ruled out. But with around 500 hectares now infected eradication is looking increasingly difficult, at least in the short term," Carter said.

Thirteen kiwifruit orchards had tested positive for Psa and 16 orchards had been quarantined by Monday afternoon.

“MAF and the kiwifruit industry are working in tandem on containment measures, including removal of infected plant material and its safe disposal; spraying infected vines; orchard hygiene measures; controls of the use of artificial pollen and advice on the use of beehives for pollination; and controls on the movement of people and equipment around infected properties," Carter said.

“Eradication of Psa versus containment or management is a fast-changing situation, but both MAF and industry agree aggressive containment is the best option for now."

(Updates with comments on Psa, QE2 and credit growth, NZ$ and exporter issues, NZX, further comments on retaliatory currency actions)

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8 Comments

John Key is realising that he has to be a Prime Minister, rather than a politician.

I think he realizes his ass is on fire when his toupee starts to smoulder.....as to his comment ....the inclusion of the word "disappointment " is a joke and a sure sign of non intervention.

Updates with quotes on currency actions

Updates with G20 comments

Updates with comments on NZX

Seems like everyone's having dinner :)

Have put in final update which includes Key's comments on the second round of QE in the States - that if some of the cash were to slosh our way, it could help credit growth here, and hence the economic recovery.

Cheers

Alex

"if some of the cash were to slosh this way"

We will see inflation go through the roof.

Interest rates would rocket and a quite a few homeowners would be stuffed.

And what about precious metals?