Resilient kiwi dollar sets exporters' teeth on edge

By Adam Bennett

Last week the New Zealand dollar proved resilient, pushing back over US69c

At least one expert expects a fall is more likely to occur next year than this year.

Despite predictions the New Zealand dollar is due for a sharp fall, exporters are resigned to another season of constricted earnings as demand for the kiwi from yield-hungry overseas investors looks likely to keep it well supported.

Late last week the kiwi pushed back above the US69c mark, frustrating those who had hoped its fall below US70c a month ago marked the start of a long-awaited decisive move lower. It finished the week at US69.46c.

"We were certainly pleased to see it starting to trend down a few weeks back but there was always the risk that it may go higher," said Affco chief executive Tony Egan.

Affco had hoped the kiwi would ease before the killing season got fully under way in a couple of weeks' time but it hasn't happened yet.

Seeing the kiwi tick upward again last week was of concern to the company. "It has become increasingly difficult over the last period to extract more money from our products."

Exporters like Affco have been suffering from the high exchange rate for some time.

"Meat industry results last season, particularly in the last six months, have reflected that impact on our profitability," said Egan. "The problem for us is our high season is between now and the middle of next year and it's during the coming six months that it will have the most impact.

"This is the period not just for us, but for most primary producers when we do a lot of our exporting. The high dollar will have a continuing adverse impact and with the potential for interest rates to go up we don't expect it to rush to the downside any time in the near future."

At 7 per cent New Zealand has the highest official interest rate in the developed world, and that makes New Zealand dollar denominated assets a mouth-watering prospect for cash-laden overseas investors.

What's more, Reserve Bank Governor Allan Bollard is expected to raise interest rates again next month and the possibility of a further increase has not been discounted. BNZ currency strategist Sue Trinh said speculation the Reserve Bank had more work to do continued to fuel the "voracious appetite for yield from foreign investors" and was delaying the eventual currency adjustment.

Demand for the kiwi was demonstrated last month in the $4.4 billion worth of New Zealand dollar denominated eurokiwi and uridashi bonds issued to European and Japanese investors. This month "it's pretty much keeping pace with what we saw in October", said Trinh.

That's in spite of Bollard's repeated warnings to overseas investors that serious imbalances in the economy mean the kiwi is overvalued and it may plummet, leaving them out of pocket when they redeem their investments.

One of the more significant imbalances is the current account deficit, the overall measure of New Zealand's dealings with the rest of the world. At present it is running at 8 per cent of GDP, which is the worst among the world's developed countries. Some fear it may widen to 10 per cent.

Deutsche Bank currency strategist John Horner said the current account deficit was not in itself sufficient to see the kiwi weaken. "But it does likely mean that when it does start to weaken, as the interest rate support fades, it probably will fall quicker and harder than it would otherwise.

"Investors are saying: "We understand those factors but we also think the yield's quite good so on a risk/reward basis we're happy to be here."

BNZ's Trinh said: "This correction that everyone is looking for ... is more of a story for 2006 than 2005. We're expecting this to probably take place from March through to June of 2006.

"By that stage perhaps the RBNZ will have completed its tightening campaign and domestic indicators will potentially show more of an entrenched slowdown in growth."

HOPES DASHED

* Exporters had hoped the Kiwi dollar's move below US70c a month ago would mark the start of a decisive fall

* Last week the New Zealand dollar proved resilient, pushing back over US69c

* At least one expert expects a fall is more likely to occur next year than this year.

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