Being in cool countries club not so bad, says John Carran, senior economist at Gareth Morgan Investments. Your opinion?

By John Carran*

The New Zealand dollar has risen rapidly since December last year. At the time of writing it was valued at just over US81c, which is up around 7.5 per cent from the middle of December.

The New Zealand-US exchange rate is close to its highest level since it was floated in March 1985.

Against the Australian dollar it hasn't been quite as strong - up around 1.4 per cent since mid-December. Among the world's most traded currencies, the New Zealand dollar has been the fastest riser over the past three months ahead of the Australian dollar and the Norwegian krona.

The trend for the New Zealand currency has been up since the early 2000s. New Zealand, with Australia, Canada and Brazil, is being viewed as part of a cool countries club - the main benefactors of global growth as demand for their commodity exports increase.

These countries' currencies have risen accordingly as investors seek to take advantage of their export successes in growing markets, especially China.

New Zealand, in particular, is seen as producing what the world wants and needs - good quality farm-based food and materials.

The New Zealand dollar's rise is also partly a vote of confidence in the underlying stability of the economy. Our banking system is sound, government debt is low by developed country standards, and we have a stable economic and political environment (despite what might be perceived from insular political debates). Relative to the moribund economies of Europe, Japan, or even the US, New Zealand's prospects seem a lot rosier.

Should we be worried about a high New Zealand dollar?

Well, our exports have generally been doing OK recently, despite a sluggish world economy.

This is largely because the prices for New Zealand's exports on world markets have been high. Indeed, high prices for our exports are partly why the exchange rate has been high.

Demand for kiwi dollars has risen as a result of higher sales of New Zealand goods and services overseas. This raises the price of the kiwi relative to other currencies - the New Zealand dollar exchange rate.

It is true that a high New Zealand dollar is particularly trying for exporters who do not currently receive high international prices for their goods and services. That is the tough reality of international trade.

The exchange rate is a price and, like most prices, it sends a signal to producers about what people value at a particular point in time.

At the moment, consumers in our main markets have collectively increased the value they attach to dairy, horticultural and meat products.

In a relative sense they don't value so much some of the non-food manufactured goods we produce or our tourism services.

This may change over time as producers of these goods and services modify their offerings to make them more attractive to overseas customers, as overseas preferences change, or as economic circumstances in overseas markets become more favourable.

On the flip-side of the coin, a high exchange rate reduces the New Zealand dollar cost of the imported materials used to produce our exports, such as oil and other fuels, metals and manufactured components.

For exporters who have significant imported inputs, a high exchange rate can help sustain profit margins in the face of possibly lower demand for their finished products overseas because of higher foreign currency prices.

Those exporters who do not get a significant reduction in their costs from a high New Zealand dollar may be forced to cut costs and become more efficient in their production processes.

A series of Treasury commissioned studies suggests that a high exchange rate may have been an important spur to productivity gains among manufacturing exporters in the late 1990s and early 2000s.

So a high dollar is not necessarily the burden to exporters that it is sometimes painted.

But what about its effect on the rest of the economy?

In general, a high dollar is likely to be positive if it is a consequence of market conditions that favour the New Zealand economy, particularly sustained growth in demand for our main exports and an economy that performs better than others.

A rise in the value of the New Zealand dollar is like a wage rise for every New Zealander receiving an income in this country because the price of imports goes down, which helps our incomes go further.

In addition, a high dollar makes New Zealand dollar savings more valuable compared to those in the rest of the world.

This means that we can do more with those savings.

We can put less aside to reach our savings goals, retire earlier, or buy more goods and services in our retirement years.

The exchange rate will continue to fluctuate between highs and lows as it is buffeted by global forces.

But, based on developments in world markets, the kiwi could remain high for long periods in the future.

Maybe it's time to stop worrying and learn to love the high dollar.


John Carran is a senior economist at Gareth Morgan Investments.

This opinion piece was first published by the NZ Herald. It is used here with the author's permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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If we were a country with net savings and trade surpluses I would agree that a high New Zealand dollar helps our net wealth and purchasing power however we are not... 
Our NZD denominated debt becomes more of a burden and harder to pay back when the New Zealand dollar rises so it's the foreign holders of our debt that get richer not us.

My understanding is,
1) A low dollar would help trade I fail to understand why you think a high dollar is good...or at least OK.
2) Because the debt is  NZ denominated we simply pay back the same amount of capital  in NZD plus interest in NZD so its foreigners who win or lose on the exchange rate.
So I think you are in-correct.

My point was simply that we are debtor nation so a rising dollar makes our net wealth in international terms shrink not expand as the article is suggesting.
We have to earn those dollars through international trade to pay back our NZ denominated debt so yes a high dollar does make it harder to pay that debt back. 

 Your analysis regarding NZ’s prospects appears consistent with the views of major overseas analysts such as Nomura Japan.
“Countries such as New Zealand, Uruguay, Argentina and Denmark can actually benefit from a surge in food prices as the positive terms of trade effect more than offsets the mild negative impact on household consumption.”
Nomura Global Economics and Strategy “The coming food price surge”
Consequently it’s difficult to understand the wailing and gnashing of teeth from Treasury and others of their ilk regarding the country’s economy.   Their conclusions are consistently that things are terrible and their extreme monetarist  type solutions must be implemented forthwith. E.g. Slash the public sector and pensions, sell the public assets, get rid of teachers, nurses, doctors, firemen and load the young up with student debt etc.   
Indeed Treasury couldn't even find anything good to say about oil discoveries in this country.

"While there is potential to substantially increase domestic production, domestic oil production cannot insulate New Zealand from global oil price shocks because New Zealand pays the world price for goods like oil.'

If I wasn’t so sure Treasury officials are objective, professional and competent I’d be tempted to believe they shape their analysis to get the answers which suit their ideology . the fact we'd get royalties or lots of employment much of it skilled....or energy security makes no difference....LOL.....Ive said if for the last 4 years, JK etc should get rid of Treasury and save a lot of money.

You say
"The exchange rate is a price and, like most prices, it sends a signal to producers about what people value at a particular point in time."
I say
Bullsh-t , trading in a currency is treating that currency as a commodity and that is what is wrong.
You say
"New Zealand, in particular, is seen as producing what the world wants and needs - good quality farm-based food and materials."
I say
Then why do we have to go round begging for FTA's and put ourselves at the mercy of the bigger economies who only have their own self interest at heart?
"A series of Treasury commissioned studies suggests that a high exchange rate may have been an important spur to productivity gains among manufacturing exporters in the late 1990s and early 2000s."
Note the words "May Have"
You base your assumptions on pure guess work as you conclude
"So a high dollar is not necessarily the burden to exporters that it is sometimes painted."
So I conclude
this sounds like a load of crap

What a load of tripe, typical of the muddled thinking of conventional economists.
The currency is strong because other economies (eg China) keep theirs artificially weak, to strengthen their export sector.  They are lucky enough to have pragmatic economists, rather than air-headed theorists.  Also because our high interest rates suck in foreign money, which we spend on our big love affair, non-productive housing.  None of this can be seen as good for NZ.
The strong currency discourages exporters, & encourages Kiwis to buy unnecessary goods & cheap petrol.  The result is a chronic current account deficit, at present running at over 4%. 
A strong currency can be a good thing, but only when it is actually the response to a strong & balanced economy, not articifial factors. 
Guys like Carran are a good example of the lunatics running the asylum.
Not that I don't have the deepest respect for him, of course.  I'm sure he knows best

When our dollar can fluctuate 10-20% in a month or more sometimes it has nothing to do with  fundementals or us being food exporters. The kiwi is a risk on, risk off trading plaything of the banks and hedge funds. John Key knows that, he used to manage huge punts on the kiwi and reap the bonuses. Yet despite huge trades he can't remember them! Yeah right.
"While Key can’t remember whether he actually executed some of the sells for Krieger’s 1987 speculative play on the kiwi, the timing suggests he did not. But Krieger continued his high-rolling punts on the Kiwi dollar after his big win, often placing $50m buy or sell orders with Key and his dealing room. The huge flow of business from Krieger and others at Bankers Trust in New York soon turned the local branch into the number one dealing room in New Zealand, cementing Key’s success and fattening his bonus packets"

Having exported manufactured product from NZ for 38 years - I say to the author - get a real job. Based on the true value of the Tradable Sector the NZ$ is so highly overvalued - based mostly on its speculative value.
To summerise. The currency gamblers provide us with cheap imports - which is great - if you can still afford to buy them.