Fears stubborn kiwi puts growth story in peril

JASON KRUPP
Last updated 05:00 26/11/2012

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Kiwi exporters are unlikely to get any relief anytime soon from the high New Zealand dollar, which has put their margins under pressure for much of this year.

Financial experts see the kiwi trapped at elevated levels due to an improving global economic landscape, ongoing demand for soft commodities, and the flight of capital to safer markets.

The Bank of New Zealand has calculated that the past year has been one of the most successful yet for those who have invested in the kiwi, as it has spent almost 70 per cent of the time above the US80c mark, but for exporters the picture has been ugly.

It also doesn't help the New Zealand economy, which is heavily reliant on exports to boost our gross domestic product - the measure of a country's income earned from the production of goods and services. It is seen as an indicator of the standard of living, so the higher, the better.

BNZ strategist Mike Jones said that with China rebounding and global growth looking pretty solid, "that keeps us in the current range".

"There's not the domestic froth to push the currency to US85c and beyond, but we're not going to see it drop too low either."

The kiwi is also drawing support from rising soft commodities.

Prices at Fonterra's Global Dairy Trade auction have risen 30 per cent since May, and are predicted to hold at these levels due to ongoing Chinese demand for protein.

Andrew Pease, head of global strategy for wealth manager Russell Investments, said New Zealand and Australia's perceived status as safe havens was also pushing the two currencies beyond what their economic performance would indicate.

Yields on New Zealand 10-year government bonds, for example, last traded at 3.53 per cent, near historic lows, with investors prepared to sacrifice income on their investments for safety.

Even some of the gloomy domestic data is expected to have little effect on the kiwi in 2013.

New Zealand's current account deficit stood at 4.8 per cent of gross domestic product for the June year, a level which under normal circumstances would start to alarm ratings agencies.

That would trigger rating cuts and in turn sap the currency - a development Finance Minister Bill English recently said he was banking on to take the heat out of the kiwi.

Pease, however, believes the contrast between New Zealand and the struggling European economies will make the likes of Standard & Poor's and Moody Investor Service more forgiving of the widening current account gap.

His view is underscored by figures that show New Zealand's net debt to GDP is projected to hit 40 per cent by 2015. In Greece it will probably hit 180 per cent and in Spain, 100 per cent.

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Adding further salt to the wounds is the fact that there is little exporters can do to hedge their currency exposure.

That is because the New Zealand dollar hasn't dipped below US80c for almost three months, meaning there are no deep dips to buy into. "Not long ago it used to be buy [hedge cover] at US70c, then US75c, now it's US80c," Jones said.

It's not a pretty picture, and one Pease said policymakers must address before it derails New Zealand's growth story. Just how they would achieve this is unclear, but he said the Reserve Bank has scope to cut the official cash rate.

- © Fairfax NZ News

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