NZ dollar hits new post-float high of 82.5 USc as National Bank Business confidence jumps 24 points in May from April

By Alex Tarrant

The New Zealand dollar rose to as high as 82.6 US cents - a new post-float high - after a National Bank survey showed a big jump in business confidence in May from April to pre-Christchurch earthquake levels and consistent with GDP growth of 4.5% over the next year.

The jump in the currency comes after Finance Minister Bill English this morning followed Prime Minister John Key in expressing concern for the high currency, which the Prime Minister put down to an inherent weakness in the US dollar. The New Zealand dollar began Tuesday trade just above 81.5 US cents, and was at 82.15 USc before the National Bank Survey was released at 1pm.

In the National Bank's monthly Business Outlook Survey, the general measure of business confidence rose from a net 14.2% of respondents expecting better times for the economy in the next year in April, to a net 38.3% in May.

The survey's pricing intentions component showed a jump in the number of firms looking at raising prices over the year ahead, although the lift was not worrying yet in terms of the Reserve Bank's monetary policy settings, National Bank chief economist Cameron Bagrie said.

Economists expect the Reserve Bank to leave the Official Cash Rate at its record low of 2.5% for the remainder of the year, before hiking either in December 2011 or in the first quarter of 2012. ANZ National expect a rate hike later in 2011.

Meanwhile the survey's composite growth component was pointing to 4.5% GDP growth over the year ahead.

Going again

Bagrie said the New Zealand 'economic patient' was "beginning to show real signs of life".

"General business confidence has now lifted 47 points in two months, more than reversing the post-quake decline seen [in] March," Bagrie said.

"Firms’ own activity expectations have shown the same improving tone. A net 40% of businesses expect better times ahead for their own business, up 10 points on April’s reading. Firms’ own activity expectations are now higher than pre-earthquake levels, and are at levels last seen in March to May of 2010," he said.

See our chart on firms' own activity expectations here.

Other indicators continued to turn for the better with profit expectations, employment and investment intentions all lifting.

"A net 34% of businesses expect to be raising prices over the year ahead, with the increase most pronounced in the service sector. The lift is not worrying, as yet, but watch this space," Bagrie said.

Will there be 4.5% growth?

The National Bank's composite growth indicator from the survey continued to strengthen, pointing to 4.5% percent economic growth over the year ahead.

"Will the improvement in business confidence be matched by reality? This time last year, the composite indicator from the survey was pointing to the same lofty rate of expansion over the year ahead as this month’s survey. Reality failed to live up to expectation then," Bagrie said.

"Is history set to repeat? No economic indicator will prove adept and timely at all junctures of the business cycle. If they were, we wouldn’t need official statistics, let alone economists to interpret them. Time and time again business confidence surveys have proven adept at picking turning points in the business cycle. It is still far from perfect. The surveys need to be read in conjunction with other information as well," he said.

"The problem with selectively dismissing, or focusing on certain indicators, is that you never know till after the fact whether you should have done the former or the latter. But for what it’s worth, this indicator is firmly pointing up."

NZ$ rise not welcome

Earlier on Tuesday, Finance Minister Bill English expressed concern about the rising New Zealand dollar. On top of weakness in the US dollar as the US Fed prints money under its second quantitative easing programme, the Kiwi has also been rising on positive New Zealand economic news. Yesterday a record monthly merchandise trade surplus of NZ$1.1 billion in April pushed the currency above 2008's post-float high of 82.14 US cents.

The Kiwi also jumped last week after interest.co.nz reported on Thursday that the China Investment Corporation may have set aside up to 1.5%, or about NZ$6 billion, of China's massive foreign exchange reserves to invest in New Zealand assets, including government bonds, companies and potentially dairy farms.

“It [the high NZ dollar] is a concern for us just because it’s a headwind to the rebalancing of the economy. We need a stronger export sector," English told media in the morning before the National Bank Business Outlook was released.

"I think the export sector’s done a very good job of delivering a significant trade surplus in the last quarter, despite the fact that the dollar’s near record levels," English said.

"Given our external liabilities, we’ve always expected that that would tend to keep the dollar down. The market doesn’t seem to be taking much notice of that," he said.

"So yeah, it’s a headwind for us, we’d prefer it to be lower than it is, because it would help shift resources into the export sector, which is where higher incomes and more jobs are going to come from."

The New Zealand dollar was freely floated in March 1985. See our chart of New Zealand dollar exchange rates here.

Not much spare capacity?

BNZ economist Doug Steel said the strength of the survey raised questions about how much spare capacity there was in the economy.

"Certainly, today’s capacity utilisation measure, in jumping up to 28.7, further questions the notion that there is lots of idle capital around. In the least it suggests any spare capacity is getting used up quick enough. The NBNZ capacity utilisation measure is now at its highest level since 2002 and is well above its long term average of 18," Steel said.

"Perhaps the more telling indicators that show there is not that much slack in the system comes via the inflation indicators. The proof is in the pudding, as they say," he said.

"Whether by way of firms’ generalised inflation expectations or their own pricing intentions, the inflation indicators are perky. Firms’ (one-year ahead) inflation expectations pushed on up to 3.3%, despite surely now the effects of the GST hike washing out of the forward looking measure and also despite a decent pull back in fuel prices during the month. Similarly, firms’ pricing intentions, in lifting to 34.2 from 27.8, implies annual CPI inflation remaining above the RBNZ target band."

BNZ continued to expect the first OCR hike on December 8, following the Business Outlook survey.

(Updates with BNZ comments on spare capacity, NZ$ move during Tuesday, Finance Minister comments, charts, Bagrie comments, Currency move)