By Roger J Kerr
The value of the NZ dollar has been under the spotlight from many groups over recent weeks; with several parties calling for intervention to bring the value down.
That is unlikely to happen as the pre-conditions for the Reserve Bank of New Zealand to intervene directly in the FX markets by selling NZD’s are not fulfilled.
The FX market is not dysfunctional and the overall TWI value of the NZ dollar is not at an extreme over-valuation level that would have major negative economic consequences.
The NZD/USD exchange rate is above 0.75 again because the EUR has recovered from $1.30 to $1.36 against the USD and global commodity prices have re-stimulated new buying interest in the commodity currencies, the AUD and NZD.
The parties calling for currency intervention include the Green and Labour political parties, who are misguided in their belief that the Government or RBNZ can take on, and beat, global FX investors and speculators in volatile currency markets.
One reason the RBNZ does not intervene is that they would be crucified in the markets by much larger punters and would loose taxpayer’s money.
Another group calling for intervention to bring the NZD down are the sawn timber exporters who have had to close and downsize their sawmills and lay-off workers. If these sawmills are only exporting into the US market in USD’s they have been hit by a double whammy of adverse currency conversion and a major slump in the US house building market.
In a strict commercial sense it is clear that these sawmill/export companies are not operating prudent foreign exchange hedging policies.
It was only eight months ago in May 2010 that the NZD dipped to 0.6600 when the Euro was sold heavily on the Greek sovereign debt crisis. Many USD exporters in other industries transacted 12-month hedging at those currency levels when they had the opportunity. That hedging at rates below 0.7000 is however rapidly running out now, so it will be critical for many exporting companies and industries as to what the NZD/USD rate does over coming months.
Further NZD gains to above 0.8000 will choke-off expected 3% GDP growth this year. Even if the NZD/USD rate remains above 0.7500, profitability and jobs in exporting industries will still be under threat.
Thankfully for the agriculture sector the high USD export commodity prices are off-setting the high currency value in terms of NZD farm-gate incomes.
Direct currency market intervention will not be forthcoming anytime soon to alleviate these financial pressures for some. Those exposed to a high NZD/USD value will be praying that the USD itself makes gains in global FX markets, as local NZ economic and policy situations are not causing any currency weakness from the NZD side of the currency pair.
The prospects for the USD on the international stage are (thankfully for the export sector) looking more favourable:-
• US economic data has certainly picked-up over the last 4-5 months
• US market term interest rates (three years plus) have started to increase, anticipating US official interest rates needing to lift in 2012.
• Civil unrest in the Middle East against dictatorial Governments may spread wider (into Asia?) and cause an investor flight to quality to the US dollar.
• The gains of the Euro to $1.3600 do not look sustainable in the light of continuing sovereign debt problems in Euroland.
The RBNZ did not help the exporters last week with an accurate musing in the OCR review that the NZ economy has improved over recent months.
The NZD/USD rate moved up another cent to above 0.7700 as a result of the RBNZ statement.
The RBNZ cannot assist the export sector at this time by reducing official interest rates to surprise overseas investors and cause NZD selling. Official interest rates have been allowed to stay too low at the 3.00% emergency stimulus levels put in place in March 2009.
By allowing official rates to remain 2.00% below market interest rates at 5.00% for two years, the RBNZ now find themselves in a jam of their own creation.
When they have the firm evidence of growth in the second half of 2011 they will increase official rates quickly in large steps to catch up to the true market interest rates already at 5.00%. That could well cause further NZD buying in the FX markets and hurt the export/productive sector even more. At a time when a cut in official interest rates would lower the NZ dollar, the RBNZ have painted themselves into a corner of having to increase official rates. The RBNZ’s mandate is to manage monetary policy without causing undue volatility in the exchange rate that hurts GDP growth.
It is not an easy situation for the NZ Government either.
The fiscal deficits and the requirement to borrow the shortfall means that they need to attract Middle Eastern and Asian sovereign wealth funds to buy our Government bonds. The overseas investment is flowing in, however unfortunately many of these new investors into our Government bonds are not hedging the FX risk after they make the investment. The net result is outright buying of NZD’s in the FX markets for the initial capital inflow, forcing the NZD/USD rate higher.
A correction downwards in global equity markets over coming weeks/months should mean investor risk is taken off the table and the NZD/USD heads south as a result.
Exporters will be praying for intervention of the divine type that the USD itself appreciates against the Euro and the downgraded credit rating of the Japanese Yen.
--------------------
* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.