Why the kiwi will keep on rising

By Neville Bennett

Friday 20th February 2004

The New Zealand dollar has surged to near record levels, and it may not yet have reached its peak.

This can be better understood through four key factors.

Current account: It used to be thought trade in goods and services was the major reason for movements in the relative value of different currencies. If the current account were the only factor, the kiwi would be back at 40USc. The trade deficit last year was the biggest since at least 1960, and has been revised to $3.4 billion. This is a dangerous level of 5% of GDP and the Treasury anticipates worse next year. This is as bad or worse than the US but while foreign investors are selling US dollars the market retains a strong appetite for ours.

Capital movements: A chronic lack of savings and a huge and growing overseas debt would normally push the dollar down. But these are ignored and the banks keep borrowing offshore to fund the housing boom. And business has been borrowing capital offshore as it gets a better hearing and better rates. This affects the dollar. So, too, does the Reserve Bank's tightening of interest rates, and a surge of eurokiwi issues (NBR, Feb 6). Last year $NZ5.7 billion were issued, the highest since 1998. A surge in uridashi indicates the spread between New Zealand and Japanese rates is important.

US policy: A tightening of US rates won't happen in election year. George W Bush is going for broke. He says he will create two million jobs this year. He has clawed rates down, is giving another tax cut, and has a huge fiscal deficit. He has a weak dollar policy to encourage manufactures and exports.

Forex markets: The foreign exchange market makers may also expect the kiwi to make gains, which hedge funds can translate into huge amounts through high gearing. Many foreign investors think commodities is the best sector to be in and some do this by buying the commodity currencies (Australia, New Zealand, Canada and sometimes South Africa). All these countries have good growth, especially Australia.

The recent G7 meeting was an opportunity to reverse the US dollar decline but nothing happened. President Trichet of the European Central Bank appeared to support more dollar selling. Currency traders will not want to hold US dollars as these could weaken further.

So where do you go for exposure to a clean currency that is likely to appreciate with the growth of commodity prices and offer relatively good interest rates?

Simple: Buy the Australian or New Zealand dollar or kiwi. You might also buy because Australia has a free- trade deal with the US and because the deputy governor of the Australian Reserve Bank signalled on Tuesday a tightening of interest rates.

The Aussie dollar immediately surged and the kiwi went up on its coat-tails. It could well go higher yet.

Comments from our readers

No comments yet