Currency speculators pull claws out of kiwi

Foreigners are bailing out. Hot overseas money - the reason the Kiwi dollar soared in value during the past four years - is flooding out of the country.

At a stroke, and requiring no action by politicians or costly intervention by the Reserve Bank, the kiwi has been dropping, in recent trading falling about 11 per cent against the US dollar and yen, and 8 per cent against sterling and the euro. The sharemarket has also dropped sharply. If we are following the same pattern as Australia, it is expected that millions in bank accounts and other fixed-interest investments will have been withdrawn by Asian investors.

The Australians make no bones about it. The Australian Financial Review says that so-called "carry trade" - a description of opportunistic investing by foreigners in their country - has ended.

Since both countries floated their dollars, Australia and New Zealand have become favourite hotbeds for worldwide speculative money trading. Both offer comparatively high interest rates and buoyant stockmarkets, have investment-grade debt, open, democratic governments, well- managed public debt and a comparatively strong export income.

The term carry trade is jargon for overseas investors who take advantage of low interest rates at home, and reinvest in other parts of the world for much better returns. In the past, Kiwis have thought of this trade being dominated by Belgian dentists or Japanese housewives, though lately the main players will in reality be much bigger ones, such as hedge funds. With interest rates not much above zero in Japan, the UK, US and Europe, they have been making handsome returns by investing here. Their investments shove up the value of the Kiwi and Aussie dollars, further enhancing their profits.

Such speculative flows are short term, and flee at the sight of trouble. It is not the sort of overseas investment we need.

The sudden drop in the currency shows how futile has been the theorising by the Labour- Greens-Mana-New Zealand First, manufacturers, exporters and unions in discussing how to bring it down. The solution was always going to come from some overseas event or issue.

It is just one outcome of the pandemonium in overseas markets because of speculation about when US Federal Reserve chairman Ben Bernanke will ease back, and eventually stop the US money printing or quantitative easing policies. As the predominant world power, the US strategy saw the American dollar slump - which was great news for its exporters.

This policy was always going to have to stop some time, seeing the US lead the world back towards something approaching reality - and higher interest rates.

This period has been an era of easy money for wealthy foreign investors - it is difficult not to make money when you can borrow for next to nothing. Today they are panicking at fears the good times are coming to an end.

No-one actually knows when the Americans will stop printing money, though Bernanke has said he could start easing later this year if the US economic data evolves as the Federal Reserve expects, adding that the programme could end by the middle of next year.

However, there are a lot of ifs and maybes. The Fed has previously said it will continue till the employment rate falls to 6.5 per cent (it rose to 7.6 per cent last month).

US GDP growth remains modest at 2.4 per cent, and inflation is 1.05 per cent below the Fed's two per cent target. Bernanke says that even if he does lower the rate of money printing later this year, the US economy will remain "very expansionary" as he plans to keep the US Federal rate close to zero.

The trouble is that big investors aren't long-term thinkers, or good listeners. All they hear is that the policy is coming to an end, so act immediately, and start rushing to take their money from so-called "risky currencies" like the kiwi and the Aussie back home to the US, sterling, and yen. Hence the massive upheavals in world markets, and the sharp rises in interest rates.

It is difficult to see what will happen next. Bernanke has wriggle room to delay easing - and the surging US dollar is not helping his hopes to rebuild the American economy.

Few Kiwis will be shedding any tears at the departure of this fickle short-term speculative money, though it is having what hopefully will be a short-term negative impact on the sharemarket.

Meantime, the sharply lower kiwi should be considered a splendid respite and opportunity for exporters and manufacturers - although it isn't good news for those whose major market is Australia.

The Dominion Post