Up, up and away as kiwi goes from Peso to pride of Pacific

By NZPA

Tuesday 4th June 2002

It was up, up and away for the New Zealand dollar today, but while it might be a good time to dust off the suitcases for that long-awaited overseas holiday, exporters are steeling their nerves for a rough ride ahead.

Dubbed the "Pacific peso" when it plunged to an all time low of US38.95 cents in October 2000, the kiwi dollar was the pride of the Pacific today as it soared half a cent to fresh 25-month highs of US49.16 cents.

The kiwi also made a 39-month high of A85.25c against the Australian dollar, 33-month highs of 33.55p against sterling and 60.65 against the yen and a one-year high of 52.12 against the euro.

The trade-weighted index, measuring the kiwi against those of New Zealand's main trade partners, also hit a 33-month high of 56.72 and the index is up 12.7 percent for the year.

Finance Minister Michael Cullen, who spooked the market last week by saying he'd be concerned if the currency rose too much because it may hurt export earnings, today downplayed the latest rise.

It was largely a result of a correction in the overvaluing of the US dollar, he said.

"The way I see it, our dollar is rising as a result of the US dollar correcting and coming down after a long period of being overvalued," he told the Bay of Plenty Times after speaking to the Bay of Plenty Export Institute.

"Clearly our dollar has risen strongly from around US42 cents, but it was a question of maintaining equilibrium," Dr Cullen said.

He would be concerned for the manufacturing sector if the New Zealand dollar rose above A85 cents, he said, apparently unaware that that level had been breached.

"If it pushed up towards A90 cents, then the exporters would be worried. They would be in danger of getting a double whammy," he said.

The speed of the rise of the New Zealand dollar had been surprising but then the speed of the US dollar correction had also surprised, Dr Cullen added.

The local unit was boosted by another weak night on Wall St where stocks tumbled to an eight-month low as the abrupt departure of the chairman of embattled conglomerate Tyco International Ltd deepened mistrust about Corporate America's top management and finances.

"That reaffirmed the story of a flat to negative performance in US dollar assets, so fund managers and capital managers around the world looked to diversify out of dollars into other currencies. The kiwi's been a big beneficiary of that," ANZ Bank head of foreign exchange John Body said.

The kiwi has risen 10 percent in the last month and 18 percent since the beginning of the year as New Zealand's high interest rates and relatively vibrant economy make it an attractive destination for foreign capital.

ANZ expects the unit to consolidate between US48.30c and US49.20c in the next couple of days, building a base for an eventual move higher towards US50-US53c.

"We think it's probably come too far too fast but the move back down will not be deep and we're really getting ready for an assault on levels above US50c in the next month," Mr Body said.

Deutsche Bank has also revised its kiwi forecasts with a 12- month target of US52c.

"Our short term concern is that the New Zealand dollar is vulnerable to a pullback, reflecting the speed of the move.

"However, on a 12-month view, we now see the NZD at US52c," the bank said in a commentary.

That bullish 12-month outlook is a worry for exporters who are hedged against the current rally but could be caught short when they come to renew forward exchange contracts.

Mr Body said the export sector was relatively well hedged but that could only insulate companies for so long.

Meanwhile, influential economic thinktank the Institute for Economic Research today warned the Reserve Bank that a further tightening of interest rates while the dollar was surging could stall the economy.

"The dollar is amplifying the effects of world commodity prices already being low, that's going to have quite a big effect on our export revenues," NZIER senior economist Doug Steel told NZPA.

"Once that starts flowing through dividends into the income of households, that will start dampening domestic demand in its own right."

The rising kiwi may see the Reserve Bank adopt a more dovish approach to interest rates. The RB said at its last monetary policy statement in May that if the dollar rose more quickly than expected then it might not have to raise rates so far.

"It's certainly done enough for them to consider not raising rates by as much as they otherwise would have," Mr Steel said.

"The last thing we need is more domestic demand depressant coming from monetary policy though interest rate rises."

Mr Body agreed.

"There's no doubt that the appreciation in the currency is a mitigant to ongoing inflation. We would imagine that whereas there were some market participants calling for 7 percent cash rates, you probably need to start to recast those expectations towards 6.25-6.5 percent."

Comments from our readers

No comments yet