By Roger J Kerr
The debate raging in New Zealand currently about the impact of the high NZ dollar value has on the economy has moved from Wall Street to Main Street (as the Americans say), as even Green members of Parliament believe they have all the answers on exchange rate policy.
The worry is that the Green Party’s economic policies generally resemble the Polish Shipyard model, which collapsed twenty years ago as it did not work.
To be fair, many countries do partially manage or control their exchange rates as part of their overall economic policies. However, that is no guarantee that a different regime of a “managed” or “dirty” float from the current free-float is the right answer for New Zealand.
The debate for us is whether politicians or Government bureaucrats sitting in Wellington can do a superior job of setting the exchange rate value every day than the free markets.
The free-market regime has worked pretty well since we floated in 1985, in particular, the exchange rate adjustment is the automatic shock absorber the economy critically needs when our export commodity prices collapse.
In early 2009 when world trade stopped briefly as bank financing disappeared, the Kiwi dollar plunged from 0.8000 to 0.5000, following the collapse of our commodity prices. In this manner, end NZ dollar prices and incomes received by our exporters are generally maintained at a stable level when there is turmoil in the world.
Do you think our RBNZ Governor or Minister of Finance would have had the foresight and balls to devalue the currency 37.5% in a few weeks when that occurred?
The markets do it automatically, just as the markets have bid the NZD higher in recent times as they see our economy and currency as a secure safe haven in a tumultuous world.
We cannot have it both ways; the currency adjusting down on lower commodity prices and then not moving up on relatively superior economic performance (partially due to rising agriculture commodity prices).
The problem with exchange rates (and it is what makes currency markets so fascinating to be involved with) is that at whatever level there are, there will always be someone who is unhappy and someone who is happy.
As the PM points out, the high NZ dollar keeps petrol prices down, imported consumer products falling in price and opportunities for manufacturers to import new machinery at lower NZ dollar capital cost.
Provided exporters operate appropriate currency hedging policies the extreme impacts can be evened-out for our productive sector.
The recent job losses that the masses are up in arms about are partially due to inappropriate or inadequate foreign exchange hedging policies by a small number of exporting companies (as I have stated a few times before). Those advocating intervention to drive the NZ dollar down to some artificial lower level are really wanting all real wages in the economy to be driven down (Economics 101 teaches you this).
The free-float regime will cause disruption and job losses from time to time in some sectors/companies who do not manage their financial affairs very well. The argument has to be centred on changing a few Boards of Directors on their risk management policies, not pushing everyone’s real wages lower.
Remarkably, the left of centre political parties are demanding the latter choice.
As expected, the Reserve Bank of Australia have produced a massive U-turn in monetary policy management and cut their official rates week.
The AUD has nose-dived from $1.0450 to $1.0150 against the USD in a few days as the reality of a slowing China/resources sector finally sunk home to the “behind-the-8-ball” mandarins at the RBA. Governor Glenn Stevens is providing one of his six-monthly testimonies to the Australian Government this week; I hope he can defend his rapid change of view on the Aussie economy.
Anecdotal evidence from the retail space in Australia is that consumers have just stopped buying larger ticket items altogether as they observe cash flow from the mining sector reversing engines. Even the Australians living in the big eastern seaboard cities know what drives their economy and thus the security of their jobs.
The AUD/USD rate can fall a lot further yet (the commodity correlation chart below suggests 0.9700) and the NZD/USD will follow as it always does.
The dominant determinant of the NZ dollar currency value is what goes on in Australia.
Can someone please send this commentary onto the leaders of the Green Party?
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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