Rural delivery: Wins and losses on the dollar rollercoaster

By MICK CALDER*

Something strange has been happening in the esoteric world of foreign exchange.

Lately, the price of the kiwi against the US dollar has hovered around the 40USc level after creeping up from the ignominious high 30s late last year. And it's on the move again.

At last the pundits' predictions of rising values are beginning to look a little more realistic, but the change has been a long time coming. And the question remains as to whether this present upswing is a nine-day wonder or a sustainable trend.

A cheaper kiwi means higher returns at the farm gate. The Meat and Wool Economic Service has shown the multiplier effect of currency changes. It estimates that a 1c move in the value of the dollar translates into 8c a kg carcase weight for bull beef.

The downside is that costs of imported items such as fuel and fertiliser rise.

But in the short term at least farmers and exporters will be relatively pleased that the rates have not followed the forecasts of the expert commentators. Most have been outlandishly optimistic; fervently predicting increasing values for the past 18 months. Taking forward cover on the basis of those projections could have been disastrous.

For example, in March 1999 when the US/NZ rate was 53USc the forecasters were pointing to an improvement to 61USc by now. I recall other optimistic forecasts when the rate was above 70USc, but my research facilities don't stretch back that far.

With the benefit of perfect hindsight it would appear that some producer boards and other exporters that suffered considerable losses from unfortunate forward exchange contracts could have been infected with the same optimism.

The reason for this swerve into the realms of science fiction is that I have been following the performance of various commentators in picking the trend in the value of the NZ dollar.

My interest hasn't been an in-depth daily inspection of the market; rather, more of a sporadic check of the commentaries to see where the experts thought the dollar was heading. I was interested in their historical accuracy and the reasoning backing up their predictions.

So I have kept occasional copies of their past pronouncements.

It's a bit like using Hansard to check whether what MPs said in opposition tallies with what they say in government.

Careful focusing on the fundamentals, checking the charts, gazing at graphs or tuning into trends led most experts to suggest the value would rise.

From early 1999, as the rate dropped towards its present low point and beyond, the predictions steadfastly held to an improvement of 10 to 15USc over the following 15 to 18 months.

Their predictive performance brings to mind the comment of H. L. Mencken: "The chief value of money lies in the fact that one lives in a world in which it is overestimated."

Maybe the present upswing in value proves that if you keep predicting it for long enough you are bound to be right sometimes.

Fundamentally, exchange rates are meant to reflect differences in interest rates, with some adjustment for political and economic conditions.

That's fine with the main currencies but the kiwi gets buffeted by their backdrafts, so it's a bit of a lottery.

Judging by the Economist's Big Mac index, the kiwi is undervalued by 43 per cent against the US dollar. Perhaps that is why the experts have been so optimistic.

* Mick Calder is a company manager, agribusiness consultant and freelance writer.