Opinion: Current account deficit not a new negative for the Kiwi

By Roger J Kerr Remember the published forecasts before Xmas when both a major bank and a local economic forecasting house predicted a substantially weaker NZD currency value in 2009 (below 0.5000 to the USD) due to our sizeable Current A/c deficit? Their foreign exchange forecasts were based on foreign investors pulling their money out of NZ as in the new world economic order countries with large Current A/c deficits are not in favour, and thus their currencies need to depreciate. I could not work out at the time as to what the fresh Current A/c news was that would cause further NZD selling by foreign investors. Our Current A/c deficit has been 8% to 9% of GDP for many years and this has not changed of late. The fact that the Kiwi appreciated from 0.5500 to a high of 0.6000 over the Christmas period highlights that there are many other short to medium term factors at play driving the NZD/USD value than the long-term structural Current A/c deficit. Interest rate differentials, the USD index and a rebound in the AUD against the USD all suggested the Kiwi should be nearer 0.6000 than 0.5000. However it is impossible to be overly positive on the NZD from here. The continuation in the fall of our export commodity prices is a big negative for the Kiwi as it will delay any export-led economic recovery. Lower interest rates are a negative as well, but by March/April the closing interest rate differential will no longer be a negative influence. There was no question that the AUD was over-sold last year when it collapsed from 0.9700 to 0.6000 in three months. A rebound to 0.7000 is not too surprising to see. The Kiwi's trading range for this year should be considerably less than last year (30 cents "“ 0.8200 to 0.5200). What I do have some confidence about is that exporters who have hedged forward their currency risks long-term will be rewarded for their medium to long-term hedging strategies/hedging policies. Bank lenders who are limiting the credit and thus access to long-term hedging dealing limits are doing their customers a major disservice and are causing the exporter to take on financial risks that they shouldn't be exposed to.   "”"”"”"”"” *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.