By Roger J Kerr
Various export industry and business lobby groups are yet again asking for 'something to be done' about the high NZ dollar exchange rate value.
There have been calls for direct RBNZ intervention in the FX markets, the Government to introduce controls on inward capital flows, a transactions tax on currency speculators and a return to a fixed exchange rate regime.
What the protagonists are really asking for is someone - that is, the taxpayers and consumers - to subsidise their profits paid for by other sectors of the economy.
These are selfish and ignorant demands by one section of the economy and it is reassuring to see the RBNZ and Government ignoring the pleas.
Should the NZD/USD rate stay above 0.8000 for a prolonged period this year it is likely to be negative for the economy in that exporter’s profits will be less than expected and thus business investment and jobs from the export led recovery lower than what they would have been under a lower currency value environment.
However, any move away from the current free-floating exchange rate system would be disastrous for the New Zealand economy; we would lose the automatic stabiliser mechanism, the shock-absorber, when global commodity prices move sharply down.
To maintain NZD-based incomes our primary sectors need the NZD to depreciate when international commodity prices reduce.
We saw a prime example of this stabiliser at work when commodities prices collapsed in early 2009 and the NZD/USD plummeted from 0.7500 to 0.5000.
The spectacular rise of all commodity prices since this time has proven that the strong linkage goes both ways.
It is a well recognised fact of life that the NZD at times can be the plaything of global currency speculators and moves around completely unrelated to our economic performance.
However the speculative-induced volatility does provide market liquidity and is something that has to be dealt with as the alternative of not having a floating exchange rate is far more negative for the economy in the medium to long term.
The result is that exporters who are financially exposed to an appreciating NZD/weak USD must either actively manage the risk under disciplined currency hedging policies or sell their product in another currency to other markets.
The latter is often not possible, therefore pro-active hedging is required.
It is still surprising to read of the number of exporters who do not hedge and then make the biggest noise of complaint when the FX market moves against them.
The NZD/USD currency risk is theirs to manage appropriately for their shareholders.
Exporters who do operate disciplined hedging policies will not be currently converting USD export receipts above 0.8000, most would have weighted-average portfolio hedged rates below 0.7200 after the opportunities to sell USD’s forward at 0.6600 in May 2010 and at 0.7150 in March this year.
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* 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
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