US move expected to push kiwi up
New Zealand manufacturers, having already been savaged by the high level of the currency this year, are likely to get no relief after the United States Federal Reserve committed to pumping further stimulus into the US economy.
Federal Reserve chairman Ben Bernanke yesterday promised to buy US$45 billion (NZ$53.3b) of US government bonds a month until the unemployment rate dropped from the current 7.7 per cent to 6.5 per cent.
The announcement, which effectively amounted to a promise to print money for at least another two years, comes on top of the US$40b a month the Fed is spending on mortgage-backed securities.
The news saw the New Zealand dollar surge up through US84 cents, a level last seen in March, promoting some commentators to speculate that further gains are in store.
Westpac currency strategist Imre Speizer sees the kiwi hitting US86c by June next year, a level matched by the ASB Kiwi Dollar Barometer, a quarterly survey which tracks currency expectations among major imports and exporters.
That's predominantly due to the outright weakness in the greenback and the relative yield advantage of investing in New Zealand, where the official interest rate is 2.5 per cent compared with effectively zero in much of the developed world.
And while that may be a boon for importers, giving them flexibility to cut the ticket prices on goods such as televisions and cars, for export manufacturers it is another blow to their already fragile bottom lines.
John Walley, head of the New Zealand Manufacturers & Exporters Association, said a New Zealand currency in the high US80c range was "nuts" and exporters were seeing their revenues fall faster than their margins.
The New Zealand dollar has gained 12.6 per cent over the past 12 months, up from US74.94c this time last year.
Businesses such as Carter Holt Harvey have already seen the effects of this, with declining demand for New Zealand cut timber forcing them to announce layoffs.
"While settings persist at this level the people I speak to are saying, ‘I'm just not going to invest in my businesses'," Walley said.
He is calling on the Government to widen the powers of the Reserve Bank from a simple interest rate level to give the central bank more tools to cool the currency, adding he thinks Government's view of the economy is far too optimistic.
At this stage the malaise seems to be constrained to pure export businesses that sell into the wider international market.
The dairy sector, for example, is supported by robust demand for protein in China, and exporters who sell into Australia are also insulated by the high Australian dollar.
But the deteriorating interest rate outlook across the Tasman could see the currency headwinds spreading across the sector.
Mike Jones, a market strategist at BNZ, sees the kiwi/aussie cross rate heading back above 80 Australian cents as the Reserve Bank of Australia continues to cut interest rates next year and the RBNZ starts its tightening bias towards 2014.
"The last hiding place in the kiwi dollar is starting to be snuffed out," he said.
Not everyone in the market is as pessimistic about the currency.
Phil O'Reilly, head of BusinessNZ, said many of the firms he spoke to recognised the high exchange rate as a hurdle they had no direct influence over, and were finding ways of working around this.
"What I tend to see these days is not ‘the dollar is a problem and Government should solve it'. Well, I get some of that, but I generally get ‘the dollar is a problem but this is how I intend to solve it'."
He said many exporters, such as whiteware manufacturer Fisher & Paykel Appliances - now owned by Chinese parent Haier - were hedging indirectly by pushing some of their manufacturing overseas and developing the "brand equity" of their products.
Additionally, some firms were starting to denominate their overseas contracts in non-US dollar terms, which can potentially reduce volatility.
However, he conceded that legacy businesses were limited in their use of these strategies, and a lack of experience and New Zealand's position on the very edge of the global supply chains were still a challenge. Despite this he believe the high kiwi was not a portent of business doom.