Why the NZ dollar is staying strong

Why the NZ dollar is staying strong

The New Zealand dollar is looking like it will be stronger for longer and that is a big challenge for the Reserve Bank.

The kiwi was sitting at 72.78 US cents at 6:30am on Tuesday. It was worth 95.45 Australian cents and 55.50 British pence.

The dollar has risen almost 7 percent since the start of the year, and the Reserve Bank's recent cut to the official cash rate has done nothing to halt its progress.

No wonder Reserve Bank Governor Graeme Wheeler was due to deliver a speech on Tuesday on "monetary policy challenges in turbulent times".

New Zealand's interest rates are at record lows. But they are still relatively high compared to other countries.

Compare New Zealand's official lending rate with these nations:

New Zealand is an attractive place to invest for offshore investors because returns are good, and both the economic and political environments are considered stable. That is an increasingly rare combination.

Investors do not just put their money in a New Zealand savings account (earning just over 3 percent per year). They put their money into other assets too.

Houses generate a lot of talk. But a big attraction for offshore investors is the share market. Many companies listed on the local market are making good profits and delivering dividends of 5 to 6 percent.

Investors are also buying government bonds. New Zealand Government 10-year bonds are paying just over 2 percent.

That does not sound like a lot compared to the average share dividend yield. But 2 percent is much higher than the negative rates on offer in Japan and Germany. Investors buying 10-year bonds in those countries are essentially paying to have the government look after their money.

That means that although rates have been coming down here, New Zealand still looks a good option for many global investors.

Inevitably the New Zealand dollar will lose value at some point. But it might not be nearly soon enough for exporters or the Reserve Bank.

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