STRONG NZ DOLLAR HERE TO STAY
Mark Lister, 3 May 2016
The NZ dollar has been rising lately, despite the surprise interest rate cut in March and an expected slowdown in the dairy sector.
While the currency is often described as “overvalued” by many commentators, there is every chance it stays higher than people expect, and possibly for much longer.
There always seems to be a chorus of complaints about the high NZ dollar, but many of these come from those with vested interests.
The truth is that we should aspire to have a strong currency. It’s a reflection of a robust economy and it means we are wealthier in a global sense, both collectively and individually.
You can take your pick of the main economic indicators, and just about all of them point to New Zealand being in better shape than other parts of the world. Our growth rate is decent, unemployment is modest, government debt is low and activity indicators all look solid.
Interest rates are at record lows, but they’re still head and shoulders above most other developed nations. When you look at the fundamentals, it’s no surprise at all that our currency reflects all of this.
The dairy sector is clearly a risk, but we’re more than just cows these days. High household debt is our other Achilles heel, and to be honest that worries me a lot more than where dairy prices are going. But on balance, we still look good compared to many global peers.
It would take something close to a recession for the Kiwi dollar to fall back to US50c. While that would please a few exporters, the vast majority of people would be the losers.
Even without the recession, many of us would still be worse off if the dollar fell to those levels. A high currency keeps the costs of imported goods down, it keeps interest rates low by suppressing inflation, and it makes it a whole lot cheaper to travel or invest overseas.
Our economy has many companies based around importing things too, or at least raw materials. They provide jobs just like the exporters do, and they perform better under a higher exchange rate.
On average, the NZ dollar is up around 5 per cent from where it was earlier in the year. The rise has been most notable against the US dollar, with the kiwi back around US70c – close to 10 per cent above January levels.
However, it’s still well down from a year ago, by 5-10 per cent against the greenback and the other major currencies. I’d argue we’re in the sweet spot right where we are.
Many exporters are doing just fine against this backdrop, even some in the manufacturing sector. Those that aren’t are probably suffering because of low demand for their products or other issues that a falling currency wouldn’t necessarily solve anyway.
We’ll likely get another interest rate cut at some point, and that could dent the dollar a little. But ultimately, our solid economic fundamentals could see it remain stubbornly above its long-term average.
That’s fine with me. I don’t think it makes any sense to wish for a weak currency, and I’d much rather enjoy the positives that go with a strong one for a bit longer yet.
This article was originally published in the New Zealand Herald on 3 May 2016 and entitled ‘Mark Lister: Strong Kiwi reflection of a robust economy’.