Growth and stability stoke demand for kiwi dollar

Wednesday 9th May 2012

New Zealand's growth prospects and its financial stability in a world contending with a European sovereign debt crisis and lukewarm US economy have stoked demand for the currency, according to Reserve Bank Deputy Governor Grant Spencer.

Global investors have been happy to put their money in New Zealand because of its medium-term growth prospects, liquid market and relative calm, Spencer told Parliament's finance and expenditure committee.

"If people look around and say 'where's a country that has a liquid market and also a prospect for growth in the medium-term?', we're one of the countries that come up," said Spencer, who is tipped as a front-runner to replace the current governor, Alan Bollard.

"We're a victim of our own reasonably good prospects in that sense." Spencer and Bollard were quizzed by Opposition politicians about the volume of trading in the kiwi, which is typically the eleventh or twelfth most-traded currency in the world, and whether there were any mechanisms the central bank can use to devalue the New Zealand dollar.

The Green, Labour and New Zealand First parties have all advocated more interventionist monetary policy in the last few weeks as exporters complained about the strength of the kiwi, although it has fallen from recent highs in the wake of European economic uncertainty and falling export commodity prices. Bollard told the committee the currency should unwind some of its gains as larger economies that printed money exit those measures, and that intervention policies are generally too expensive to use. "We want to see the highest currency that is consistent with our competitive position on a long-term sustainable basis," Bollard said.

"But as it's reflected we do think we've been on a higher level in recent months than that." Earlier this month, Bollard warned if the currency remained persistently high without an improvement in the economic fundamentals to support that strength, he may have to cut the official cash rate from its record-low 2.5 percent.

Traders are betting the central bank will cut the OCR by 27 basis points over the coming 12 months, according to the Overnight Index Swap curve. Since April 29, the New Zealand dollar has shed 4.5 percent against the greenback, recently trading at 78.5 US cents, after fears over Europe's financial stability re-emerged after Spain's sovereign credit rating was cut two notches by Standard & Poor's.

The trade-weighted index has dropped 3.1 percent to 70.51 over the same period. Bollard told the committee the liquidity of the New Zealand dollar improves access to funding, but that the heavy trading in the currency also has disadvantages, with "positions being taken that have got no particular relationship to New Zealand's competitive position or to our trading needs."

BusinessDesk.co.nz

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