The rise and rise of the NZ dollar exchange rate

11 July 2014

News release

The rise and rise of the NZ dollar exchange rate
– implications for the New Zealand economy

Over recent weeks there has been much commentary and analysis of what factors have driven the NZ dollar currency value to record post-1985 float highs. Reasons cited range from the ‘rock-star’ economy attracting capital inflows, to rising NZ interest rates when the rest of the world remains at 0%, global investors entering ‘carry-trades’ and aggressively buying the Kiwi dollar, benign conditions and extreme low volatility in international investment/financial markets, to positive reports on NZ from credit rating agencies and a weak US dollar.

PwC Partner and Treasury Management Lead Roger Kerr says, “The US dollar itself has in fact moved sideways over the last two years and has not been a factor in pushing the Kiwi dollar up. The high flying Kiwi dollar is of course great news for consumers enjoying discounted prices on imported goods. However, the latest push upwards in the NZD/USD rate to 0.8800 has been disastrous for the economy in respect to exporter profitability, productive output, business investment in our most important industry sectors and thus jobs.

“The negative implications from the over-valued exchange rate for the overall economy over the next six to 12 months are serious and considerable. Surprisingly, there appears to date to be scant recognition and understanding of what this latest currency appreciation means in real terms.

“Over recent years, our export companies have been better hedged forward against adverse exchange rate movements than ever before. However, the prolonged period above 0.8000 over the last nine months has meant that the legacy hedging contracts are running out. For many exporters converting USD sales receipts above 0.8500 is doing business at a loss. They will not tolerate that situation for long and many are already cutting back production and thus their workforce.

“Whilst the economy enjoyed record high agricultural export commodity prices (up until four months ago) the negative impact of the high Kiwi dollar was counteracted and disguised to some extent. A lot has changed over recent months.
International dairy prices are dramatically down 30% and are likely to go lower. The stark reality of the NZ dollar strengthening and diverging away from weaker economic fundamentals (i.e. lower wholemilk powder prices) is about to hit the economy.

“Current forecasts of 3.5% plus GDP growth will need to be hastily revised significantly lower as a Fonterra milksolids payout closer to $6.00 for the next2014/2015 season compared to $8.40 last season wipes $3 billion off dairy farmer incomes.

“The recent collapse of export log prices has caused “carnage” in the forestry industry as small to medium operators stop cutting trees completely. Adding to the rapidly deteriorating export industry situation is lack lustre consumer and industry demand from our largest export market, Australia. A NZD/AUD cross-rate above 0.9300 compounds the problem for exporters into Australia.

“Eventually, the negative impact on our economic performance will be more widely recognised and understood, resulting in the NZ dollar depreciating. Sharply lower dairy prices will also eventually pull the NZD lower. However, to counteract the Reserve Bank of New Zealand pushing the NZ dollar up with increasing interest rates at this time, the only short term hope for our export industries has to be a stronger US dollar on global markets when Federal Reserve Chair, Janet Yellen is ultimately forced to change her tune on US monetary stimulus policy. Unfortunately, the inevitable change to the Fed’s rhetoric may still be a few months away,” concludes Mr Kerr.

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