Mark Lister, 14 August 2018

The NZ dollar took a pounding last week, falling to the lowest levels against the US dollar in two and a half years. This came in the wake of a surprisingly downbeat Reserve Bank statement, which pushed out the official forecasts for an OCR hike until late 2020.

That was a more cautious view than anybody was expecting, and financial markets took notice. Even though the OCR didn’t change, the “lower for longer” guidance saw longer term domestic interest rates fall to the lowest levels since late 2016.

The currency was down against all major trading partners, most notably the US dollar. It finished last week under US$0.66, down more than 12 per cent from where it was in the middle of 2017.

However, this is not only about what’s happening on the local front. As our economy loses a bit of steam, America is gathering momentum. Unemployment is low, confidence is high, tax cuts are boosting business investment and the place is firing on all cylinders.

While our Reserve Bank “watches, worries and waits” its American counterpart is doing nothing of the sort. The Federal Reserve has increased interest rates seven times in the past three years, and could do twice more this side of Christmas.

That’s seen our traditionally higher interest rate differential evaporate, with the US cash rate now above ours for the first time in almost two decades, and the margin growing.

Money goes where it sees growth, and where it gets a reasonable return for acceptable risk. For a long time that was New Zealand, with an OCR head and shoulders above everyone else. These days, the US is the place to be.

We’re not the only ones in this situation. The “US dollar index” is up seven per cent since the end of March, so many global currencies have also declined relative to the greenback.

The average level for the Kiwi dollar over the last 25 years is US$0.66, exactly where it is now. On that basis, you could argue it’s probably about right.

However, currencies rarely stay around the average for long. It’s more likely we see a little further weakness, especially if the interest rate differential becomes more pronounced.

Having said that, it’s highly unlikely the NZ dollar will fall through the floor. The currency fell below US$0.50 back in 2009, but it took the GFC and a 66 per cent collapse in global dairy prices to do that.

It went even lower back in 2000, falling to US$0.39. Again, those were unique circumstances. A recession was looming in the US, and the S&P 500 was in the process of losing half its value as the dotcom bubble burst.

We’re extremely far from those sorts of conditions today. Even if our economy slows as the Reserve Bank predicts, it’ll still be growing faster than the UK, Japan or Europe. Few countries have an unemployment rate as healthy as ours, and even less have a government balance sheet as strong.

A few more cents of downside will be welcomed by many export sectors, including commodity exporters and the tourism industry. A number of our number of listed companies might also consider this a sweet spot.

On the downside, our global purchasing power isn’t likely to be quite as good as what it has been in the past. That will filter through to increasing prices for some products, and will put additional pressure on those reliant on imported materials.


This article was also published in the NZ Herald on 12 August under the title "Mark Lister: Why the Kiwi dollar took a pounding this week".