Fall in dollar cheers exporters

OPINION: Exporters are likely to be feeling a bit happier at the moment because of the New Zealand dollar's pull-back over the past two weeks from near United States 76 cents to just over 71c , writes Tony Alexander this week.

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

Firstly, 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 New Zealand dollars on an expectation of improving interest rate returns versus the likes of the US dollar, the British pound, the euro and Japanese yen. The expectations have been driven by the tightening of monetary policy in Australia and the recently released data showing New Zealand 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 Reserve Bank last week only slightly changed its monetary policy prediction from keeping the cash rate low until later in 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 kiwi will face the same upward pressure broadly as two weeks ago.

Secondly, it 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 kiwi.

This has happened twice before since the kiwi'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 kiwi 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 per cent 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 per cent falls in house prices had to hang 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 per cent and 15 per cent. We said back then that anyone looking to make a canny purchase in the housing market should look to do it before the middle of this year.

Well, prices only fell about 11 per cent at their worst and have now gone back up 8 per cent.

New Zealand 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 buyer's market would only be temporary hence the absence of a 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 proper 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 New Zealand house prices continuing to rise – and as we have pointed out a few times over the past few years, house prices and the New Zealand dollar tend to move in the same direction.

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

- © Fairfax NZ News

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