Problem is what to do about the rising kiwi

OPINION: The New Zealand dollar has got itself reasonably solidly consolidated above the US70 cent mark over the past few weeks and unless something truly unexpected happens, it seems highly likely we will eventually get back to the 82c level reached in March last year, writes Tony Alexander this week.

The rising kiwi is frustrating the farming sector tremendously and especially starting to anger those in the sheep and beef sector who were just starting to see improved returns following about three poor years.

Plenty of people have made calls for something to be done about the high New Zealand dollar. But there is nothing logical which the Reserve Bank or the Government can do to get the kiwi down in the short term.

Here is a popular idea – cut the official cash rate by another 0.5 of a percentage point. At the moment the official cash rate is 2.5 per cent. This is a record low and if that does not keep the kiwi down, then taking the rate to 2.0 per cent cannot reasonably be expected to worry investors much at all. Also the dollar has soared, not because of interest rate differentials, but simply through investors moving back into volatile risky assets.

But the big problem with cutting interest rates further is that it would only encourage the already robust upturn in the housing market. The number of consents issued for the construction of houses has risen a seasonally adjusted 12 per cent over the past three months. Average house prices have risen 6 per cent since January. Real estate agents report shortages of listings, and there are reports of increasingly hectic bidding at auctions and crowded open homes.

Lower interest rates would only further aggravate the already unbalanced nature of this upturn – one that is domestic as opposed to export-led. It would, of course, be fantastic if the upturn were export-led, but that is not going to happen. That calls into question the longevity of this upturn, but that is a separate matter.

Some suggest getting the exchange rate down by fixing it. That is a physical impossibility as the Government does not have a large enough balance sheet to borrow foreign currencies to sell, and in exchange, buy the New Zealand dollar when it is facing downward pressure. Stopping the New Zealand dollar rising would mean allowing interest rates to plummet as dollars were flooded into the financial system – again shooting the housing sector skywards.

Some advocate ditching the New Zealand dollar altogether and adopting another currency. That would be better than attempting to fix the kiwi – but also an exceptionally bad idea.

If we adopt the aussie we remove currency uncertainty for only 20 per cent of our exporters, give practically no benefit to farmers (who send hardly anything to Australia), and have a currency whose level is determined by coal, iron ore, gold and uranium prices.

Adopting the United States dollar is even sillier as fewer than 15 per cent of our exports go there and our economy has a very different export base.

There is no obvious answer for solving the New Zealand dollar's tendency to rise very high and be volatile. This problem definitely aggravates our export performance and therefore retards our economic growth.

There is probably only one thing exporters can seriously do to handle the problem and that is a process at least one company we know follows. Hedge forward expected foreign currency receipts five years every month, regardless of the New Zealand dollar's level. That way lots of time is bought to handle sustained currency moves – at the cost of a timely benefit when the kiwi falls. Supplementing this process with options would be a good idea at times of a high currency – such as now.

Realistically though, most companies will not get the credit lines to do this and forecasting export receipts five years out is very difficult for primary producers.

Exchange rate volatility is here to stay. Tony Alexander is chief economist of the Bank of New Zealand (BNZ).

» Tony Alexander is the chief economist for the Bank of New Zealand.

- © Fairfax NZ News

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