Lower NZD: Mission impossible


You might think the Reserve Bank's efforts to lower the New Zealand dollar are starting to look like mission impossible.

It cut the official cash rate yesterday and the dollar leapt in value. That is not supposed to happen.

The strong dollar makes imports cheaper, but it reduces the amount New Zealand exporters make when they sell their goods internationally.

Yesterday's rise in the kiwi was largely due to panic buying by traders who had wrongly predicted that the Reserve Bank (RBNZ) would make a bigger cut to the OCR.

But the frantic trading underlined a bigger problem for the Reserve Bank (RBNZ).

The kiwi is likely to stay stronger for longer.

The problem for the Reserve Bank is that the factors driving the New Zealand dollar are largely beyond its control.

Foreign investors are pouring money into New Zealand because the investment returns are good and both the economic and political environments are considered stable.

It is getting harder for global investors to find that magic combination these days.

The Reserve Bank can cut the OCR but that is not going to deter an offshore investor who wants to put money into something like the New Zealand share market. Locally listed companies are paying annual dividend yields of over 5 percent.

Investing by overseas fund managers is one of the factors driving the share market to record levels. As the market rises more foreign investors are taking notice.

New Zealand ten year government bonds are paying a return of over 2 percent per year.  Compare that with the negative returns on offer in places like Germany and Japan.

So investors can either pay the Japanese and German governments to look after their money, or they can earn at least a couple of percent a year in New Zealand.  What would you do?

The Reserve Bank looks certain to cut the OCR further but the reality is that New Zealand rates will still be high by global standards.

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

Japan 0 to -0.1 percent.

Europe 0 percent.

UK 0.25 percent.

US 0.50 percent.

South Korea 1.25 percent.

Australia 1.5 percent.

The Reserve Bank at least has some room to move. We are still a long way from zero. But other countries are looking to devalue their currencies as well.

It will be little consolation to exporters, or the Reserve Bank, but the high dollar is a sign the New Zealand economy is doing relatively well compared to the rest of the world.

A really weak dollar would be a sign that there were fundamental problems with the economy.

The kiwi will lose steam at some point. But perhaps we should be careful we do not get too much of what we wish for.


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