Reserve Bank must stop muscular kiwi going for broke

By NZPA

Friday 26th September 2003

From an exporter's point of view, the New Zealand dollar has started going for broke.

The Timber Industry Federation, worried about a US1.8c jump last weekend, said this week that a 2 US cent rise in the exchange rate would probably take out any export profit margin.

It has been particularly volatile in the last week or so after the Group of Seven, prompted by the United States, sent world markets reeling with comments pushing for looser currency regimes.

The G7 statement was taken as a dig at Japan and China for government involvement in currencies, and pushed the greenback to a three-year low against the yen this week.

US President George W Bush, who is running for re-election next November, is under pressure from American companies who blame the Chinese government's eight-year policy of pegging the yuan to the US dollar, and Japan's regular selling of the yen, for US job losses and a record current account deficit.

The New Zealand dollar has been caught up in the scuffle, rising about 20% in less than a year, with exporters worried they will bear the brunt of a more muscular kiwi.

Statistics are on their side, with New Zealand posting the worst current account deficit yesterday in three years at 4.6% of gross domestic product, because of the strong kiwi and poor global economy.

On the plus side, many companies conduct a large proportion of business with Australia, or have a natural hedge because imported parts are sourced in US dollars.

Large exporters also hedge their exports, delaying the pain.

But economists predict their situation will get worse, with a stronger currency making exports less competitive and imports cheaper, worsening the deficit in the process.

At the joint International Monetary Fund/World Bank meeting in Dubai, Finance Minister Michael Cullen made that point on the world stage this week.

Weakness in the United States currency threatened to dampen activity in New Zealand's economy, he said.

"We have somewhat confusing signals out of the US on these (currency) matters... and where is it going to leave the little small mouse running around the corner, which is the New Zealand dollar," he said.

Senior economist at Berl, Ganesh Nana, says New Zealand's "latest ride on the exchange rate carousel is damaging our long-term growth prospects.

"Tradable sector distress is best reflected in the bleak outlook for forestry exports."

Forestry is New Zealand's third largest export sector, employing about 23,000 people, but it is already going through its worst period since the 1997 Asian financial crisis.

However, Bancorp Treasury Services director Earl White said the market appeared to have become more comfortable with the New Zealand dollar at US60c.

"We've been trading sideways for about three months now and that was to be expected after the huge move up over the previous 12 months," White said.

"Now the New Zealand dollar is starting to get comfortable above US59c again, and everybody's talking about a test of the US60c level and maybe going through this time."

The difference between interest rates in the US and New Zealand is about the same now as it was in the 1990s, when the kiwi rose from 50 US cents to US70c, creating a crisis for exports.

"I'm not saying the New Zealand dollar is going to go to US70c - and I hope it doesn't because it would be pretty destructive for the economy - but if it gets a head of steam who knows what could happen?" White said.

He wants the Reserve Bank to become more proactive in its attitude to the currency.

Even in Australia the central bank intervenes, with the Reserve Bank of Australia having sold about $A4 billion in the last six months.

"What they say is it's just balancing their assets, but the reality is the RBA was a significant buyer of Australian dollars when it was falling a couple of years ago and now it's a significant seller, so they do try to smooth the rate of change.

"That was reflected in the kiwi/aussie cross rate six months ago that went up to A93c -- they were trying to slow down the appreciation of the Australian dollar and we've really got no control over ours ..."

There are so few New Zealand dollars that it doesn't take much offshore interest to make a big difference -- and market players know the central bank will not intervene.

"The Bank of Japan has bought $US100 billion so far this year to try and keep the yen above 115 (to the US dollar) -- well, it's at 112. If they can't do it, what chance have we got?" White said.

The Reserve Bank can cut interest rates, but it would be loathe to do so because lower interest rates would fire up an already hot housing market.

"... the Reserve Bank's going to have to make up its mind about what's more damaging -- a higher currency and permanent damage to the tradables sector, or the possibility of some structural problems from the housing market.

"At the moment they're managing to sit on the fence but the markets may not let them to do that for too much longer," he said.

Also, using interest rates to make short-term changes to the exchange rate is like trying to turn the QE2 on a dime.

Cutting the benchmark rate - currently at 5%, compared with 1% in the US - by 25 points isn't going to do a lot if the kiwi's going up against the greenback by 1% a day.

The New Zealand market tends to go boom or bust because there are no smoothing factors in the currency market.

"What we really need is a Reserve Bank that is much more reactive and proactive - they left interest rates too high for too long," White said.

"We were tightening while everyone else was still easing.

"You've got to be a bit more subtle about it and not get too far out of step, but we continually get out of step and our interest rate markets continually get out of step with the rest of the world," he said.

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