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Govt worried about record high NZ$ against US$, but good news accompanies the bad, PM Key says

Govt worried about record high NZ$ against US$, but good news accompanies the bad, PM Key says

By Alex Tarrant

The Government has concerns about the high New Zealand dollar against its US counterpart, but the main reason for today's post-float high of 82.16 US cents is an inherent weakness in the US dollar, Prime Minister John Key says.

Speaking at his weekly post-cabinet press conference, Key expressed concern about the NZ dollar, but said there was a 'good news' story stemming from the high exchange rate as well.

“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.

"In the short-term that is proving to be very challenging,” Key said.

Asked how much higher he thought the New Zealand dollar could rise, Key - a former currency trader - replied he did not know.

“Look you’re in unchartered territory so that’s of some concern,” he said.

The good with the bad

There were good news/bad news parts to the story.

“For many of our exporters, there is an imported component of what they export, so that reduces that price. For New Zealand consumers, it takes the pressure off oil prices and imported goods, and for commodity-based exporters, life is a bit more bearable because obviously commodity prices have been high," Key said.

Those exporting to Australia were also benefiting through a low NZ$ against its Aussie cousin.

“But I think we all acknowledge that for the manufacturer that's in a non-commodity-linked area, selling into a US dollar-based market, these are levels that are not sustainable,” Key said.

Key acknowledged that some of the perceived strength in the NZ dollar was also because of good news stories coming out of New Zealand, such as today's record monthly merchandise trade surplus of NZ$1.1 billion in April.

NZ 'the envy of many'

New Zealand was also the envy of many other economies, with its budget surplus track over the next three years.

“On one hand I think we delivered the budget that the international markets would say they would like to see in their own countries. At the end of the day we’re returning to surplus, we’re holding debt at under 30% of GDP, we’re anticipating good wage growth and job growth," Key said.

"That’s one of the reasons why I think New Zealanders by and large, notwithstanding the cuts they’re having to make, are supportive of the budget," he said.

"But obviously we just have concerns about that very high New Zealand-US exchange rate."

Govt at fault as well?

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.”

Key said it would not be appropriate to comment on whether the Reserve Bank of New Zealand should intervene in the currency markets to try and bring the New Zealand dollar back down, as the central bank was independent from the government.

(Updates with comments on govt influence, RBNZ intervention)

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13 Comments

Wow, 'come in spinner' ,as my Aussie mates say. Tell the good news to the apple industry.

  Interesting the weak US$ doesn't come up in discussions over here. Although I did have an interesting talk with a regional bank manager and a few others about the sharemarket. They were in their late 50's and were concerned that their pensions were being overly weighted in the share market, in fact with interest rates this low almost %100 exposure. They were all very aware that the baby boomers were beginning  to retire and would be cashing up shares. The amazing thing was that they were all convinced to get out of shares. I thought, ok so they will be selling %30 or maybe %50 but no they were talking about getting completley out. They felt that the low interest rates were behind the share market strength and that they were too old to go through another cycle.

 They also felt that interest rates were a major weakness as they are so low that they could double or quadruple and that would create havoc in the housing market. In California the attitude to Immigration was the opposite that I found in Phoenix, here Mexican labor is seen as a saviour as, who else would do the work at these wages? In Phoenix, its turning the place into the wild west, with crime rates rocketing and people very concerned.

 Saddest part of my trip. Talking to my daugters friend who lost her only brother in Afghanistan last month to an IED, inconsolable grief.  These guy's really are at war and its tragic for so many families.

Wow, I have relatives and friends in all those places and more - and indeed you've encapsulated the mood and the opinions well.

Only thing I would add is that regardless of most seeing/understanding these things - they still consume in the classic American way.  The welcoming of Mexican labour in Phoenix is one example.  If they mowed their own lawns and dusted their own coffee tables, they wouldn't have the problem - if there was no market for illegal, immigrant labour - their wouldn't be the associated social costs.  And of course now, there are millions of children who were born in the US, went through primary and secondary school in the US, but have no papers (legal status).

Kate , you are right. All the cars are parked outside because the garage is full of stuff they dont need but its too good to throw out.

 Phoenix really is a mess. My liberal friends dont employ Mexicans only Americans there are no jobs but still they pour over the boarder. They now carry concealed wepons and im not convinced which end of the barrel is safest.  Its odd the lights go green and you treat it like its a give way, any immigrants flying down the road on P? Go back to Sacramento and they toot the horn at me.  First generation of migrants pick the crops, their children get a good education so they have to bring more in to do the work, its an interesting cycle.

 The middle class American is much better off than a middle class Kiwi as its so much cheaper to live there, an example I always have a cooked breakfast, a bacon omlette with spinage, 2 cups of coffee and a bun for the wife was $14. Grabed two cubs of coffee and some breakfast in AKL airport and it was $37. 

Kate, if your were an academic you may have the time between research papers and a couple of lectures a week...but you will find many kiwis struggle to find the time to do their own cleaning and a lot of chores....because of the demands of work and any time is scarce for their families....work life balances sucks for most that work if you scratch below the surface, can't think of a country where this trend is not the case :-)

I work across the states and I agree meeting people effected by the wars the US is involved in is a truely humbling experience, the grief is immense.

They middle class there has more money in the market than you typical middle-class kiwi and generally have more wealth to worry about. At least they have investments to worry about.... although this is a classic case to not have all your money fixed into pension schemes regardless if the tax system there favours it :-)

 

I await an announcement from the oil companies with bated breath.

Not a sausage.  Typical.

Interesting point of view from James Grant market observer...on creeping inflation....

http://www.youtube.com/watch?v=dexHf5LdFgA&feature=player_embedded#at=108

"We're returning to surplus" that's a classic comment to make just after our worse ever record deficit.

Couple of questions for John Key:

If it's just a US dollar story then why is our currency at a three year high on the Trade Weighted Index?

Why do you think it is inappropriate for a government to actively try to manage its currency when the most successful countries do just that?

And why take a hands off approach when the world's largest economy is engaged in a 'beggar thy neighbour' policy of trying to print and devalue its way out from under its debts, creating inflation elsewhere?

How are we going to create high paid and interesting jobs that will keep our kids here when manufacturing exporters are being slammed by this currency?

How can you say our borrowing levels are better than the United States when our budget deficit this year is only slightly lower than America's as a percentage of GDP?

cheers

Bernard

 

 Bernard writes: How are we going to create high paid and interesting jobs that will keep our kids here when manufacturing exporters are being slammed by this currency?

In the current worldwide environment currency wars are just a daily occurance. The only way to increase NZmanufacturing (real production) and skill is the government allocating high tech infrastructure needs to NZcompanies, the NZworkforce, the wider NZpopulation and not importing in the billions.

 How much longer does it needs until you people economists understand that and the positive correlations of it ?

 

Bernard - the questions for PM Key should be:

 Why does the government import infrastructure needs in telecommunication, energy and transport in the billions, when unemployment is high, youth unemployment a time bomb and skill levels low ?

Why does the government not provide strong incentives to support NZproduction – manufacturing in order to reduce the account deficit and support exporters ?

Bernard,

You said

How are we going to create high paid and interesting jobs that will keep our kids here when manufacturing exporters are being slammed by this currency?

A glass half full way to look at things, if the USA is determined to murder the purchasing power of the USD, young, mobile, skilled people at the start of their career may be pushed to leave the USA and earn money in a stronger currency.  Like ours.

Of course, that doesn't solve the problem of HOW our companies will create enough jobs in this environment to employ those people.  I'll give you that one.

Those questions Bernard are worthy of persuing ....but perhaps not to accept the first answer given as seems to be par for the course for most Journo's interviewing the P.M.

Key said it would not be appropriate to comment on whether the Reserve Bank of New Zealand should intervene in the currency markets to try and bring the New Zealand dollar back down, as the central bank was independent from the government.

Uh Huh...?then bolly gets summoned to a meeting with Billy Bob to shoot the breeze and swap girlfriend stories.....duh.

Australia's influence though the local banking sector will have an underlying influence and agenda.........most of the talk and positive statement is all from this group....talk it up talk it up talk it up...the leaked info about China's investment was initially exaggerated deliberatley by the Bank spokes people.....thankfully people like GBH put the numbers into perspective  in a post yesterday........

I feel strongly that people have lost sight ..of the fact that the man ..who would be King is still a money trader....unproductive speculator....and old habits die hard.

The Herald today has that picture of JK and son

Based on recent Key prognostications I am surprised they missed the caption

'Planker & Plonker'

 

Boom, Boom!

Basel