No relief in sight for manufacturers
Ailing manufacturers are not expected to get any relief from the high kiwi any time soon, with the country's perceived "port in a storm" status with offshore investors helping keep the currency up.
That's according to currency market strategists, who expect the New Zealand dollar to hold its ground or continue climbing over the next three to six months.
The kiwi recently traded at US82.20 cents, just shy of a six month high versus the greenback.
At this level it already putting a hard pinch on manufacturers and hard commodity producers, with the Nuplex, KiwiRail, Solid Energy, Rio Tinto and Norske Skog collectively shedding hundreds of jobs over the past few months.
The companies in this bracket are proverbially caught between a rock and hard place because the high kiwi makes their goods less price competitive to overseas buyers, or bites into their margins if they compensate for that.
Additionally, those selling into the local market are also facing increased competition from non-manufacturing rivals who can source their goods offshore more cost effectively.
BNZ market strategist Kymberly Martin said some manufacturers are sidestepping the effects of the currency appreciation by exporting into Australia, where the exchange rate is hovering around the middle of its long term average.
However, slowing demand from China is seeing New Zealand's biggest trade partner come under pressure.
Official figures show the Australian economy expanded at a 0.6 per cent pace in the three months ending June, down from 1.7 per cent in the first quarter of the year.
Westpac market strategist Imre Speizer said that while hedging strategies can help manufacturers soften the currency blow, high levels of market volatility mean the effectiveness of these so-called insurance policies will be limited.
Risks include Europe's souring economic outlook and the increasingly fragile state of its heavily indebted member countries, as well US tax hikes and spending cuts which kick in at the end of the year.
"The risks on the horizon, if they don't materialise, mean we could get a strengthening of the kiwi, and we could see a near-term target of US85c broken," Speizer said.
If that happens, it's bound to put more pressure on the already suffering manufacturing sector, and the 250,000 people it employs.
Nor can manufacturers expect any help from the Reserve Bank.
"The RBNZ learnt from past experience that intervening is not always successful," said Martin, referring to the bank's failed 2007-2008 action when the Kiwi/US dollar cross rate ranged between US76c and US80c. "They are also aware that a cut in interest rates, in itself, is not going to bring currency down either."
The one upside is that currently the effects are not likely to flow through into the primary sector, thanks to rising soft commodity prices which are helping offset the kiwi's rise.
Dairy prices have risen about 21 per cent over the past two months at Fonterra's fortnightly GlobalDairyTrade auction.
Speizer believes that's a level that's likely to hold regardless of whether the global economy slows further.
- © Fairfax NZ News