70c, here we come?
This could be it. The time when some weakness creeps into the NZ dollar, and it actually stays down. The currency has fallen almost 10 per cent against the US dollar since early July, which the export sector and the Reserve Bank will be very happy about.
However, we've been here before. The NZ dollar has traded in a range of roughly US75c to US85c since 2011 and on three separate occasions it has fallen more than 10 per cent within a few short months, only to rise right back up again soon after.
But this time it may be different. The dairy payout looks as if it will be down by a third compared with last year, taking a several-billion-dollar chunk out of farm incomes.
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The average payout over the five previous years is $6.80, so the current $5.30 forecast is certainty weaker than we have seen for some time. We have to go back to the 2008/09 season to find a payout close to those levels, when Fonterra paid farmers $4.72 a kg.
During that period we had seen the global dairy trade price index fall 65 per cent, much more than the 45 per cent fall since February. This was a key reason the NZ dollar fell 40 per cent in less than a year, from US82c to under US50c in early 2009.
It's unlikely we will see anything similar to those movements, given the other contributing factors back then, but the trend could be similar over the coming months.
We are getting close to a change of tack from the US central bank, which has spent the past five years with near-zero interest rates and a substantial money-printing programme in place.
Having peaked at a pace of more than US$100 million an hour, the money-printing is likely to finish up this month. This could be followed next year by interest rate rises in the US and while these will be only gradual, it's still a significant milestone.
Our currency's strength over recent years has been due to our strong economy, but also because other currencies have been so out of favour, in particular the US dollar. If global money markets decide they like the US dollar again, the weakness in our own currency could accelerate quite quickly.
Generally, some sustained NZ dollar weakness would be good for our export industries and our sharemarket.
Companies with international operations like Fisher & Paykel Healthcare, Delegat Group and Mainfreight would do particularly well.
Tourism would get a solid boost, so companies like Auckland Airport and SkyCity would benefit. It would also benefit investors who have taken advantage of the strong currency over recent years to diversify into offshore markets. But if the dollar falls too far, inflation might start to increase as the goods we import cost more and businesses increase prices to pass those costs on. That would become a drag on real wages and could see our Reserve Bank start thinking about interest rate rises again.
So there is definitely a sweet spot, and it's probably between US70c and US75c. Any more than that, and the headlines about struggling exporters will be replaced by stories of struggling consumers and importers calling on the Government to get the currency back up to more reasonable levels.