Watch the NZ dollar rise

Fairfax Media

NOT SO FAST: Exporters are likely to be feeling a bit happier at the moment because of the NZ dollar’s pullback. But we would advise against getting too happy.

Relevant offers

Industries

Keeping with the 100% Pure message Fonterra sells stake in AFF joint venture Telecom granted more time for info systems separation Lamb, beef and dairy prices Report calls for Govt backed exploration business Capital controls not the answer Trans-Orient to drill for oil Debt soaks up milk payout Key rejects Goff's call for changes to monetary policy Five Mile venture sold to Aucklander

OPINION: Exporters are likely to be feeling a bit happier at the moment because of the NZ dollar’s pullback over the past two weeks from near US 76 cents to just over 71 cents.

But we would advise against getting too happy. The Kiwi dollar has not been pulled down because of some reassessment of the true health of the NZ economy. It has fallen only for two reasons.

First, many people in the markets were getting ahead of themselves expecting the Reserve Bank to tighten monetary policy as early as January next year. Those expectations had been encouraging buying of NZDs on an expectation of improving interest rate returns versus the likes of the US dollar, British pound, Euro and Japanese Yen. The expectations have been driven by the tightening of monetary policy in Australia and the recently released data showing NZ inflation higher than forecast.

But our economy is not shooting ahead like Australia's and the data in hand could not allow one to say yet that the upturn is on a firm footing - even though we think the direction upward is clear.

The RB last week only slightly changed their monetary policy prediction from keeping the cash rate low until the latter part of 2010 to keeping it low until the second half of the year. Their comment was less weak than expected so the optimistic interest rate cut expectations have shifted and the markets now generally expect a tightening in March. And all that means is that the markets were two months ahead of themselves. So come early January the NZD will face the same upward pressure broadly as two weeks ago.

Second, the NZD has fallen because of a bout of heebie jeebies going through the world markets regarding US growth. This has caused some large falls in sharemarkets and investors have also sold other risky assets like the NZ dollar. This has happened twice before since the NZD's upward surge started in March - in April and in June. It will undoubtedly happen again but from a higher level.

The track for the NZD remains upward and exporters have been presented with an opportunity to increase their hedging.

One other interesting development this week was the release of something called the NZ Property Report looking at monthly website real estate listings. The report claims to capture over 90 percent of such listings and shows that no Spring surge in listings by vendors has occurred. Such a surge was fairly much all the errant people still forecasting 40 percent falls in house prices had to hand their unanalytical hats on.

The situation with regard to house prices in New Zealand is as blindingly obvious now as it was about 18 months ago when we forecast that house prices would only fall between 10 percent and 15 percent. We said back then that anyone looking to make a canny purchase in the NZ housing market should look to do it before the middle of this year. Well, prices only fell about 11 percent at their worst and have now gone back up 8 percent.

NZ has a housing shortage which is getting worse because net migration inflows are above average and rising, and house construction is at its worst levels in four decades. Borrowers are flocking to the market attracted by the lowest floating mortgage rates also in four decades, and vendors seem to have realised that the buyers market would only be temporary hence the absence of a huge sign of relief flood of listings.

And finally, with finance companies mere shells of their former selves (too much lending to themselves, their mates, and other bad borrowers we banks would not touch), the availability of funding for subdivision developments is quite poor. Plus, next year we expect lots of builders will go to Australia anyway to take part in a construction boom over there as there is a massive housing shortage.

It all adds up to average NZ house prices continuing to rise - and as we have pointed out a few times over the past few years, house prices and the NZD tend to move in the same direction. 

Tony Alexander is chief economist at BNZ