By Gareth Morgan*
Let there be no mistake, New Zealanders want the NZ dollar to be as high as possible.
A 65 US cent dollar makes us a hell of a lot poorer than an 88 cent one.
So why does the Reserve Bank (RB), cheered on by our Prime Minister (PM) dream of reducing our wealth via the route of degrading the value of our currency?
We all know if a cheap dollar were the path to national riches, Bangladesh would have arrived by now.
Why do we want a high dollar?
Simple, we can buy more stuff.
A high dollar means cheaper imports, cheaper overseas holidays, it makes us richer compared to the rest of the world.
If you want to save your pennies a high dollar is good too – it means you can own more overseas assets with the same up front investment.
A high dollar is normally a sign of economic success for a country – a sign that the rest of the world wants to buy what we have to sell.
We should be cheering the day we have parity with the US dollar.
The question of course is what level should our dollar be now so that we get to the promised land? And on this the RB and the PM have formed the judgement that the market – that infinitely deep pool of decisions made by all investors, speculators and traders of NZ goods and currency – is “temporarily mad” – that the RB and the PM know better, and the currency should be cheaper.
Good luck to them both with that.
We have been here before, where institutions and politicians think they know better than the market as to what a price should be.
So they exert what influence they can to engineer an outcome that aligns with their preconception. Sometimes they have an affect, sometimes they don’t – it all depends whether they succeed in influencing the expectations of market participants.
In this case the RB and the PM apparently feel that the recent level of our dollar has restricted the ability of the RB to use interest rates to quell inflationary pressures without boosting the dollar further.
They also perceive it invites a substantial blow-out in our current account deficit as exporters struggle to earn enough foreign exchange to fund our demand for imports without reliance upon unwelcome accumulation of external debt to fund the gap.
Sine the currency was floated 30 years ago this has been a repeated refrain from the RB and the government – that the exchange rate is overvalued.
Of course the data speaks for itself.
They have been wrong, soundly wrong on that score.
For 30 years the currency has maintained a much higher level than politicians and RB Governors of the day have tended to desire. And of course over that 30 years the external debt position has grown, albeit with a switch from government to private debt.
So what are we to make of these latest outpourings of concern from the RB and PM?
Of course with the deflation of dairy prices lately one would have expected the currency to take a bit of a hit anyway. All we’re seeing is the RB and PM seizing the opportunity to try and influence the currency lower than the market alone would engineer. They clearly hope we might gain some perceived temporary advantage in the form of better prices for exporters and more leeway for the RB to use the interest rate to dampen inflationary pressures.
But as soon as the global dairy price cycle reverses (assuming it does once the inventory cycle works through) these efforts will be quickly forgotten and the currency will resume its 30 year track.
In other words the currency is a market price and nothing officials do – short of either changing the economic fundamentals or deliberately undermining the credibility of our overall policy mix – will change that.
Their efforts then simply add to market volatility – a dream scenario for currency traders but of little additional content.
What’s the “right” value of the NZ dollar? It’s whatever the market is prepared to finance. As we saw when the current account deficit was 8% of GDP, the private capital inflows still funded that deficit. So it’s a very brave – or silly – person who declares that their preconception of what value the currency should be, is anything but a guess. This is what markets do, they set prices. How easily people forget.
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This article was first published on the blog garethsworld.com and is re-published here with permission.
10 Comments
Disagree.
The 3 bears options are available.
Too hot (as recently)
Too cold (we have have briefly in the past) and
Just right (nirvana but hard to decide where it is)
A cooler dollar is a means by which governments can up their income without too many moans.
Key is way out with his 65cënt "Goldilocks" value - more like chilled porridge
"we could buy more stuff"....
Which would be good if we had an import-orientated economy or low debt or cheap infrastructure.
As we have export-orientated conomy, high debt and high interest, and expensive per disposable earings infrastructure...then "buying more" isn't good.
must be nice to have too much money, eh NZ?
Well Gareth, we agree here (but not on Stewart Is. or your enthusiasm for The Kims of N. Korea). The pollies that bully the RB into doing stupid things like these interventions (in the middle of a RB tightening cycle of all times!) do not want US plebs to have more wealth - just their greasy mates who have the inside running. It is not in the political classes interests to have wealthy and independent plebs, regardless of their rhetoric. Who would need them and glorify them then?
Ergophobia
Thank you Gareth for bluntly stating what is obviuos to most of us , with the exception of the politicians . I dont like the Kiwi$ being so strong , but my view is not derived from any form of altruism , its purely selfish .
And I have said before , the market is usually right , as much as politicians and exporters may dislike it .What really pisses politicians off is that they are unable to control the market.
That they cannot 'manage' the market or the price of the currency is exactly the way it should be.
If they were let loose to go poking around with our freely traded currency , God help us all
Maybe true Cowboy, but not if they take a bath on a falling Kiwi - Wheeler has cast a doubt in some of their minds now, and whilst Key's 0.6500 is fanciful, while they can leave that doubt in some punters minds for sometime, we may be able to get the currency to settle at a mid-level for a while. That will assist the productive sector without having to reduce rates which Wheeler has no intention of doing, indeed he will raise them further next year if he can get the dollar lower and more settled. But I think both him and Key would be more than happy with a settled 0.7500 NZD but I wouldn't be betting my money on any level in particular in this global environment.
There is a significant chicken and egg question on which I believe Gareth's argument fails.
For 30 years the currency has maintained a much higher level than politicians and RB Governors of the day have tended to desire. And of course over that 30 years the external debt position has grown, albeit with a switch from government to private debt.
In my view with that statement he proves the governments stated case over the 30 years. I'm not sure by the by that governments tried to lower the dollar at all- the short term pain may be worse than the long term benefits in a 3 year election cycle.
Is the debt or sold assets supply driven or demand driven? In my view it is supply driven. The banks flood the country with foreign derived cash, and this finds a market, buying up assets or adding debt. In turn that supply drives up the NZ dollar. Collateral damage is done to productive and trade impacted industries, who then are forced in a vicious circle to a reduced business, to add debt, or to sell, often to foreigners. Proof that the debt is supply driven came in 2009 at the height of the GFC. Capital flows dried up, the exchange rate tanked to 50c, but the current account deficit was closest to balance that it has been in 40 years. I wouldn't recommend that sort of extreme circumstance; but there is likely to be a goldilocks rate in normal trading circumstances. That would in my view have the current account in balance, and according to the IMF is about 15% below current levels. That gets you to Key's 65c more or less.
In the short term we enjoy cheaper overseas holidays on the foreign debt- at a NZ Inc level. Yes our houses have been bid up in NZD terms, but we have lost ownership or equity in some, while it is not evident to me that the quality of housing is significantly better than it would otherwise be.
Would we be wealthier now if we did not have so much debt, or if we had not sold so many assets? The answer seems self evident.
Yes there are winners and losers in each scenario, but the main wealth gainers in a high dollar, high current account deficit scenario, are foreigners. I note that the cost of government core crown expenses in NZ has gone up 25% in USD terms under National. That is cost to the productive part of NZ of ~$18 billion per annum, given that in nearly all tradable activity we are price takers and not price setters. Add in council costs and the burden of costs that exporters have no control over, and must in the end pay for, is enormous. Yet government employees probably do not feel all that wealthier. No wonder we take on more debt or sell off assets as fast as foreigners will buy them.
I am all for goldilocks.
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