NZD Finally Gets Comfortable Over 50 Cents

Headline article from the BNZ Weekly Overview of December 16.

NZD Finally Gets Comfortable Over 50 Cents

News of the week has to be the rise in the NZD to over US 51 cents and almost 91 cents against the Australian dollar. First, why has the NZD been rising since early this year and second, why this most recent push upward?

Back in February the NZD was buying US 42 cents and AUD 81.5 cents. It crept up to US 50 cents in June then pulled back to US 45.5 cents before rising again since about October. The NZD’s rise can be put down to the following factors.

- Attractive interest rates. Our official cash rate sits at 5.75% whereas the US rate for most of this year was 1.75% and the Australian rate 4.75%.

- Our domestic economy has grown very strongly at a time of major doubts about the performance of the US economy.

- Our current account deficit is sitting at around 2.5% of GDP compared with near 5% for the United States.

- The US dollar has weakened against other major currencies and at the start of December was down 7% against the Yen and 10% against the Euro compared with the start of the year.

- Expectations of rising world growth at some stage which will lead to higher NZ commodity prices and therefore a rising currency.

- General acceptance that the NZD is undervalued.

The factors which have come along more recently to push the NZD higher include the following.

- Strong NZ domestic data such as a 12% rise in building activity during the September quarter.

- Weaker than expected US data including a 43,000 fall in job numbers in November.

- Fresh weakness in the USD.

- A widening of the interest rate differential following the 0.5% cut in the US funds rate to 1.25%.

Last week we saw the USD fall to a two year low against the Euro and fresh three week low against the Yen in response to a whole range of factors including

- North Korea saying they will restart their nuclear reactor.

- Speculation on what the new Treasury Secretary John Snow may say about the “strong dollar” policy.

- News of a possible nuclear programme in Iran.

- The usual worries about Iraq.

The geopolitical factors have pushed gold prices to a five year high.

Will the NZD keep rising? We see further upside toward US 54 cents on the back of continuing strong local economic growth, continuing attractive interest rates, a slow improvement during the first half of 2003 in expectations for accelerating world growth further out. Against the Australian dollar we think however that further gains will be limited though this depends upon how the two factors which have held the AUD back against the USD so far track out - namely the drought and the extent of the housing downturn.

For exporters the rising NZD up to US 50 cents was probably no great surprise though the rise to AUD 89 cents was more than would have been anticipated. This means many manufacturers are probably already feeling the pinch while exporters to other countries who engage in hedging and receive USDs should be getting revenue near their previous expectations. From now on however the rising NZD is likely to cause more widespread pain. But this won’t prevent the continuation in the first half of 2003 of the domestic economy’s growth which has underpinned the economy over the past year. In fact to the extent that the rising NZD keeps inflation in check the reduced chances of interest rate rises will maintain momentum in the housing and retailing sectors.

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