By Bernard Hickey
Prime Minister John Key has welcomed a potential 'parity party' if the New Zealand dollar reaches A$1 later today as some expect.
The Reserve Bank of Australia is widely expected to cut its cash rate by 25 basis points to 2% at 4.30 pm New Zealand Time, which could prove the impetus for the New Zealand dollar to rise over 100 Australian cents for the first time. It hit a high of 99.78 Australian cents over the weekend and was trading at 99.41 Australian cents in morning trade.
Key told Paul Henry a parity party was a sign of New Zealand's economic success and he downplayed the impact on exporters. Australia is the largest export market for New Zealand manufacturing exporters.
"In a lot of ways, it's a point of celebration because it shows our economy is doing well," Key said.
"It's a double edged sword. For exporters, they also often have an imported component. I do think it's a sign of confidence in New Zealand," Key said, pointing to an article in The Australian lauding New Zealand's economy.
'Winston on the warpath'
However, the currency's persistent strength in the face of slumping dairy prices is flaring again as a political issue in the wake of Winston Peters' by-election win in Northland.
Peters' constant refrain that the currency's strength is hurting the regions and reinforcing the shift in investment, people, attention and growth to the big cities (and Auckland in particular) is getting traction in and around Parliament. The increased media coverage of the collapse of logging contractors and trucking companies in Northland, Gisborne and Nelson in recent weeks is a symptom of that.
Much weaker than expected US jobs figures on Friday night (126,000 jobs created versus expectations of 243,000) reinforced the New Zealand dollar's strength against the US dollar and the New Zealand dollar is at 80.64 on the Trade Weighted Index (see chart below), which is just 1.2% below its record high of 81.66 set in July last year.
The New Zealand dollar strength will also make it harder for the Government to achieve one of its key targets -- to lift the export share of GDP from under 30% when it was elected to 40% by 2025. In six years that share has either stagnated or fallen.
Economic Development Minister Steven Joyce said on Thursday the Govenrment may have to revise the target lower after Statistics New Zealand rebased one of its measures 4% lower. See my article on that here.
Opposition comments
Labour Finance Spokesman Grant Robertson said the high New Zealand dollar meant some tourists will have cheaper Gold Coast holidays, but New Zealand incomes would stay lower for longer.
“New Zealanders want to earn more. To do that we need to sell quality products for good prices overseas. A Kiwi dollar equal to the Aussie – our biggest trading partner – holds our exporters and incomes back," Robertson said.
“The real parity we need to work towards is parity of incomes. That’s when it’s time to have a parity party. But the higher our dollar is, the lower our incomes are."
Robertson said the Reserve Bank needed to keep interest rates higher than almost any other developed country to stop the housing crisis from exploding.
“If the Government stopped sitting on its hands and built more houses, Graeme Wheeler would have more scope to lower interest rates and take the pressure off our dollar. Only that way will our exporters, who are the real wealth creators, be able to compete on a level playing field and create good jobs and higher incomes," he said.
(Updated with Roberston comments)
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28 Comments
Lets not be cynical , John Key has actually done a remarkable job , spending on infrastruture in partiuclar roads , has been massive since 2008 .
He has managed the budget well , let the free market do its thing and given us some tax relief , one could not ask for more .
Chris one reason Christchurch has such bad roads is Canterbury is the province that receives the smallest proportion of its transport taxes (fuel taxes and RUC) back in transport spending from the NZTA in the last decade.
I suppose you're one of those doomsters who missed out on the greatest DJIA bull run in human history. Well I put my strong NZD to good use there - thanks John. Or are you one of the doomsters who missed out on the Auckland property bull run? I didn't. Thanks again john. Be warned, too much doom porn can make you blind to opportunities right under your nose.
Make sure you lock in those gains by deleveraging and are also comfortable losing the cream of the top of any assets you do keep.
Undoubtedly we are nearing a peak. Christchurch is already starting to turn with an oversupply of mid priced new homes, a rental market returning to normal/oversupply, and the bulk of insurance money drawing to a close within the next 12 months or so.
Auckland gains are purely speculation on further gains at this point in time ... That always ends in tears.
If your investments only just cover outgoings, then set a time for your appointment with the official assignee. For safety at the moment make sure you investments are not only self funding (cash flow not capital gains) but make you a surplus equal to the current outgoings, that way you will be ready when the proverbial hits the fan...
Yup I'm one of those doomers. "Missed out" is an interesting choice of words, where to from here? After loosing about 10k in the share market during the GFC I decided it could be better to go into business for myself, rather then wasting money investing in something I had no control over. I had bugger all back then.
Today I have a debt free house with an "Old Mcdonalds Farm" of 30ha, my business and a couple of rental properties with 30yr mortgages that NET 10k/pa. While you and those like you choose to place your financial future with the market that is driven emotionally by fear and greed, I only look at cashflow. I only need a couple more rentals like the ones I have and I can retire at 35.
I'm sure glad I didn't listent to some old fart saying I should double down in stocks and use my wages to top up an LAQC rental in Auckland. Sure the returns have been exceptional, better then anyone could have guessed back then, but I doubt I would have achieved financial freedom that way.
We will see a convergence of energy, the economy and the environment within the next decade. Not to mention the US pushing for a war with Russia or the growing conflicts in the Middle East that have no signs of a resolution. I'm happy with the choices I have made, I have worked hard and had some lucky breaks, now whatever shape the economy is in I will be fine. While you and those like you will be hit very hard by any kind of downturn,
Watch wage growth rates in NZ flatline as employers see a reduced risk of losing staff to AU so see less pressure to give pay rises. From 1.35NZ per AU earnt not long ago to 1 NZ per AU earnt today, people who moved to work in Aus (prehaps with NZ donominated debt) have seen a hefty pay cut in NZ $ terms
Key will only be right IF local businesses pass the savings on to consumers , ie lower petrol and diesel prices , and cheaper manufactured goods ,.
Our petrol and diesel prices ( taxes and RUC notwithstanding ) remains 50% more expensive than Aussie
In reaility , local businesses will not pass the savings onto Joe and Jane Public
The overall picture seems nuanced. Noone would advocate Aussie's route to devaluation- apparently dysfunctional and rather negative government, and most particularly, massive overinvestment in mining. Key in particular has been an effective cheerleader for NZ's economy, and that in itself is positive on the economy, and for the most part, the country's culture and sense of well being. National have not apparently blown government spending to be too high- nor did Labour before them either as it happens.
However the high NZ dollar must be having serious effects on NZ's trading industries, and a range of other countries have addressed their currencies, while still having positive economies. This effect, not just of the high currency itself, but all the capital flows associated with it, seem to be distorting the economy very considerably, and mostly negatively. Very significant sales of assets and long term wealth are clearly occurring. Property, in Auckland in particular, (and separately of farmland) seems to be the main driver of the economy, and that funded by sales of a good portion of that property to foreigners.
For those who choose to have a parity party, at least be aware that the bill for the party could be expensive.
The exchange rate is the most important price in our whole economy.
If the pound has not fallen after the election the Chancellor should, within a revised policy framework, consider ways of getting it lower and keeping it there, says Roger Bootle.
This article, re the pound, is in today's Telegraph, and seems timely. I could not have written it better for NZ, and the Minister of Finance needing a revised framework with the RBNZ. Bootle is one of the City's leading economists, according to the right wing Telegraph.
I note that the pound has actually depreciated against the NZD over the last 15 years by 20-30%, so if it is overvalued, the NZD is very high indeed.
http://www.marketoracle.co.uk/Article50133.html
And that’s all a big shame. New Zealand is not poor, but it’s by no means as rich as Australia or Canada or Germany or the US. What it does have is the potential to be largely self-sufficient. A potential that is being squandered in order to play with the big boys of globalized trade.
New Zealand has only 4.5 million citizens, one third of which live in Auckland. It has vast tracts of productive land that are now used to feed export oriented cows and American pines, neither of which are even native. It could have a great shoe industry, plenty of leather, and a textile industry, plenty of wool. But New Zealand, like everyone else, imports such basic needs from China. While having scores of unemployed people. When will that light go off?
The country’s prime minister since 2008, John Key, used to work at Merrill Lynch and the New York Fed, and that sort of background guarantees valiant efforts to sell anything in the country that’s not bolted down, and take an axe to what is. It also guarantees zero initiative to become self-sufficient.
But then there are many tragic countries and societies in the world who all suffer from the same maladie. I’ll leave you with some reflections by the man who I’m told is New Zealand’s best business writer, Bernard Hickey in the NZ Herald...
Agree that a high dollar is nothing to celebrate. Australia is our 2 nd biggest export market, a huge source of overseas tourists -and a competitor for domestic ones.. The damage to the export and tourism sector will be great. The aggressive interst rate stance of RNBZ must be questioned more. With excess money being printed and low inflation globally, high interest rates make us the safest of bets for all that capital sloshing around. The myopic framework that the RBNZ operates under needs a major overhaul.
No one addressed some structural issues in NZ. Houses are a non productive investment, that investment needs to be turned back towards productive enterprise but with our cost structure and high regulation thats unlikely. Banks prefer the safety of housing which they can control the price of via lending criteria,also we have far to many young people failing at school, leaving with very low skills.
16 billion of dairy exports last year, this years price halved, who's going to fill the 8 billion dollar hole?
Thats something I have been thinking about. The real impacts will be felt around christmas time because of the way fonterra structures it payments. Govt has also spent 12B on Chch to date, that figure is going to shrink as well, most of the insurance money is already in. We are facing some significant headwinds that I don't think have been very well accounted for. Time will tell, but I'm expecting some kind of downturn.
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