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New Zealand farmers face at least a 12 per cent drop in milk prices as the kiwi rises at its fastest pace since 1985, according to Fonterra, the world's largest dairy exporter.
That explains why Reserve Bank Governor Alan Bollard last week called the exchange rate against the US dollar "unhelpful" and "a real risk to us" as the country endures its deepest recession in three decades.
Similar concerns are besetting Canada and Australia, two other commodity-rich economies.
All three countries' dollars are close to posting their strongest quarters against the greenback since at least 1971.
Traders see the currencies as undervalued because signs that the deepest global recession since World War II is ending are fuelling demand for raw materials.
The rallies are testing policy makers, hampering growth by sapping commodity earnings and putting exporters at a disadvantage.
"We don't really see any green shoots in our markets in New Zealand and the rest of the world," said John Walley, head of the New Zealand Manufacturers and Exporters Association in Christchurch.
"And the high exchange rate is strangling any that are poking their heads up."
Policy makers already have started trying to talk down their currencies, sparking speculation central banks may lower interest rates, print money or buy their own legal tender to curb the gains.
The Bank of Canada this month reiterated comments that the Canadian dollar's "unprecedentedly rapid rise" may "fully offset" economic gains.
Australian Treasury Secretary Ken Henry said: "If today's exchange rate were to continue, that would imply some downside risk."
New Zealand Finance Minister Bill English said last month his Government would prefer a weaker dollar.
"The markets should keep a look out for language that justifies intervention to cap New Zealand dollar strength," Ashley Davies, a currency strategist in Singapore at UBS AG, said last week.
The Reserve Bank of New Zealand started intervening in June 2007 after Bollard foreshadowed the move in April.
New Zealand's dollar is the biggest three-month spot-return performer against the US's legal tender after Australia's dollar and South Africa's rand.
As of Friday, when it closed at US64.31c, it had gained 15 per cent so far this quarter and 23.6 per cent since March 12. The best quarter since 1971, as far back as Bloomberg data go, was a 16.6 per cent gain in 1985's third quarter, just after New Zealand ended exchange-rate controls the previous March.
The aussie closed at US81.24c, up 17.5 per cent this quarter; its record, 11.4 per cent, was set in 2003's second quarter. Canada's loonie, named for the aquatic bird on its coin, had strengthened 12.5 per cent this quarter as of June 12, when it ended at US89.27c.
Its quarterly record, set simultaneously with Australia's, was 9 per cent.
The rallies are being driven by investors moving money out of US Treasuries and other traditional havens for higher-yielding assets in commodity countries. Ten-year Treasuries yielded 3.79 per cent on June 12, while Japan's equivalent debt was at 1.51 per cent, compared with 5.54 per cent and 6 per cent in Australia and New Zealand, respectively.
"Net bond outflow from Japan to Australia has increased from just A$480 million ($607 million) in early 2009 to A$2.2 billion, a one-year high" on a three-month moving average basis, said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney.
There may be little Australia, New Zealand and Canada can do to restrain their currencies as long as US stimulus efforts keep its dollar weak with record budget deficits, a near-zero benchmark interest rate and money-printing.
"The Reserve Bank of New Zealand is already out there trying to jawbone the currency lower, but we don't think that will necessarily work," said David Forrester, a currency economist in Singapore with Barclays Capital unit.
In Canada, increased oil demand is buoying its dollar.
Canada's currency jumped last month by the most in 59 years, prompting strategist Shaun Osborne at TD Securities, a unit of Canada's second-largest bank, to predict parity with the US dollar by the end of the year. The two currencies were last equal in July 2008.
Profits at Canada's lumber companies, which account for about 5 per cent of its exports, are getting squeezed when US sales dollars are converted into their own currency.
West Fraser Timber, which is Canada's biggest lumber producer and gets about half its revenue from the US, says every penny drop in the US versus the Canadian dollar cuts earnings C$14 million ($19.5 million).
The Vancouver company cut its dividend on May 29 to 3c a share, from 14c. Vancouver-based Canfor, the No 2 lumber company, closed three sawmills last month, cutting 570 jobs.
"We really have a crisis," said Jay Myers, head of Canadian Manufacturers and Exporters, an Ottawa trade group.
"The stronger currency may be the tipping point" for companies suffering from falling demand and rising costs. Manufacturing sales fell 25 per cent since August, Myers said.
Eric Lascelles, the Toronto-based chief economics and rates strategist at TD Securities, said the Bank of Canada's currency warning "was quite a departure" because it "tends to be loathe even to mention the currency".
The bank is unlikely to take more action because governor Mark Carney "takes the currency as a given rather than something to push around", Lascelles said. It "may create a drag on the economy, but other things are good".
Canadian existing-home sales rose the most in more than five years in April as prices fell and consumer confidence rebounded, the Canadian Real Estate Association said last month.
The Australian dollar's rise hurt its trade balance, which unexpectedly turned to a deficit in April as lower coal and iron ore prices led to the biggest drop in exports since 1997.
BHP Billiton, the world's biggest miner, cut spending, fired workers and closed mines as the slump curbed demand. Profit at the Melbourne-based company, which constitutes 14 per cent of Australia's benchmark stock index, fell 57 per cent in 2008's second half, its worst since 2004.
The company will find it harder to revive profit growth as the Australian dollar holds down the value of its earnings and iron ore and coal prices drop from last year's records.
Each US penny rise in the aussie reduces BHP's full-year net income by US$80 million, the company says.
"We are not out of the woods yet," Australian Prime Minister Kevin Rudd said this month. "We will face higher unemployment in the Australian economy, and we are not guaranteed that we won't see negative growth in the future.
"These are tough times."
The aussie has been bolstered by signs of the country's own recovery. Its statistics bureau reported that gross domestic product unexpectedly expanded in the first quarter. The country lost fewer jobs than expected in May, increasing speculation that Reserve Bank of Australia Governor Glenn Stevens will increase rates within a year, making its currency even more attractive.
Of the three economies, New Zealand is in the worst shape after at least four consecutive quarters of shrinking GDP, compared with two straight in Canada and a negative one followed by a positive in Australia.
New Zealand's manufacturing industry contracted for a 13th month in May as the recession and rising currency slashed sales abroad. The New Zealand Institute of Economic Research warned this month that a stronger currency would curb exports and delay recovery as much as nine months.
Traders buying New Zealand dollars "are tending to ignore local factors, mainly that our central bank is trying to talk the currency down and an economy which is struggling," said Jason Wong, who oversees the equivalent of US$2.9 billion as head of investment strategy at AMP Capital Investors New Zealand in Wellington.
Economic "data is still pretty subdued", he said.
Fonterra, a co-operative responsible for more than a third of the world's international dairy trade, last month said its 10,700 farmers probably will see their collective income drop by $830 million.
The company made that estimate last month after lowering its price forecast for the year ending May 31, 2010, to $4.55 per kilogram of milksolids, down from $5.20 in the previous 12 months. The lower-than-expected forecast is the cheapest since 2006 and was based on an exchange rate of US59c.
New Zealand's dollar is so strong that "you have to ask can it be justified, given that the authorities are worried about the negative impact on the economy," said Mitul Kotecha, head of global currency strategy in Hong Kong at Calyon, the investment banking arm of France's Credit Agricole.
- BLOOMBERG
