Swings and roundabouts for the kiwi

Bigger picture: Yes, more stability would be good for exports, but how to cut back on foreign loans?

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BUSINESSES may get some respite this year from the extreme volatility plaguing the kiwi dollar, say analysts, but it is likely to be only temporary.

The kiwi is one of the developed world's most volatile currencies and last year traded in a huge range against the greenback from below US50c to above US75c – twice the range of major currencies such as the euro and the pound sterling. The picture is the same over long periods, with Reserve Bank data showing New Zealand's dollar was the most volatile of six comparable countries between 1986 and 2009.

Currency specialist Kevin O'Sullivan, head of foreign exchange at broker OM Financial, picked the dollar to ease from its current level of around US69c.

"There's going to be volatility, particularly in the first half of the year, but as soon as there's a sniff that they're not only removing stimulus in the US but are going to adjust interest rates up, I think the US dollar will strengthen quite dramatically in the second half of the year.

"I'll be looking late this year for the kiwi to be closer to US60c than it is to US70c, if not lower."

O'Sullivan's view is not universal, but he was one of the few to pick the dollar would soar against the greenback last year when it was slumped around US54c.

This year, he said, "I expect to be pretty correct like I was last year."

If O'Sullivan's call is right, it would still represent a less violent swing than in previous years.

Another whose comments last year proved close to the mark was economist Anthony Byett, of consultancy FXmatters.

Asked for his current view, he said he expected the kiwi to end this year in the US65c-US70c range as a robust Australian economy supported currencies on both sides the Tasman.

A downside scenario, he said, involved a fall in the global sharemarket which would fuel a rally in the US dollar and could push the kiwi below US60c.

But he stressed that the kiwi's volatility is a fact of life.

"It's not going away," he said. "Too many [firms] think it's a problem that'll go away and the last year or two was exceptional. Well, at the margin it's exceptional, but the bigger picture is currencies are volatile and most likely we'll still have the currency going through some big swings over the next five or 10 years.

"Whatever [firms] do, they need to build that into their planning."

The causes of the kiwi's big swings are not fully understood, but it is clear that speculative investment flows are a big influence.

According to data from the Bank of International Settlements, the NZ dollar's average daily turnover in 2007 exceeded that of large trading currencies such as the Singapore dollar and the Korean won – a reverse of the position in 2001.

The kiwi was the 11th most traded currency that year, with the bulk of trading happening in London. A big contributor to trading volume is the swap market, used by New Zealand banks to convert their overseas borrowing into kiwi dollars and interest rates.

Reserve Bank data shows average daily turnover in kiwi/greenback currency swaps was $9.3 billion last year, well ahead of the local spot market's $1.1b daily average.

The banks' activity doesn't drive currency swings in itself, said Byett, but it may help create opportunities for speculators.

"I think if we all borrowed less overseas, we would probably see less volatility in the currency."

And less volatility would be a good thing, he said.

"Companies are getting a lot better at dealing with the volatility, but I do believe a more stable currency would encourage more firms to export."

The Reserve Bank seems inclined to agree, telling parliament's finance select committee in 2007 that "it would be surprising if the magnitude of the exchange rate swings... was not causing some damage."

With several currency forecasters predicting less violent swings this year – BNZ's Danica Hampton, for example, expects dips below US70c "to be short-lived" – businesses may get a steadier platform to build on for a while.

- © Fairfax NZ News