Tuesday, 01 May 2012 11:27

High dollar continues to confound

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THE NEW Zealand dollar is surprisingly high and probably overvalued, says Westpac chief economist Dominick Stephens. But he told Rural News that he doesn’t buy into reports that the Kiwi dollar is heading towards 90c vs the US dollar in the coming year.

Stephens says during 2012 export prices have fallen while the US dollar has remained very strong. But he says he doesn’t expect that to continue. 

“Indeed we’re expecting a further decline in export commodity prices and the New Zealand dollar to dip as a consequence.”

There are many reasons for the high New Zealand dollar, Stephens says. A crucial one is that international investors have limited safe places for their money at a decent rate of return. 

“One place global investors have decided is good to put their money is New Zealand Government bonds. They may be chasing the slightly higher returns they offer but more importantly the perception of safety is a key factor. Of course, to buy Government bonds they need to buy New Zealand dollars and that’s creating demand for [them],” he says.

Another factor is that reinsurance companies are buying our currency to meet their obligations as a consequence of the Christchurch earthquake. 

“Thirdly, although export commodity prices have fallen, export volumes from New Zealand have been strong. If you’re selling a lot of product and you’re earning foreign currency as is Fonterra, you have to pay your farmers in New Zealand dollars. I think all those three factors have conspired to increase demand for New Zealand dollars,” he says.

But Stephens does not agree with a recent suggestion the New Zealand dollar could rise to 91c vs the US dollar.  

“There were predictions along those lines last year as well. Currencies are very difficult to forecast and I certainly wouldn’t rule out that sort of thing. But for me the New Zealand dollar is trading well above its long-run share value. Some of the things holding it up are not going to continue forever. So a declining trend in the New Zealand dollar is a better forecast.”

Stephens says he also understands the demand for New Zealand Government bonds may be waning and he notes that one day reinsurance companies will finish meeting their obligations.

But Stephens concedes the high-dollar period is most unusual. He agrees farmers may have a legitimate complaint about high input costs which he says should, in theory, be lower because of the high dollar. 

“Ultimately what farmers would like to see is a period when the New Zealand dollar is low and product prices are high. We’ve pointed out this seldom happens so don’t hang out for it.”

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