Exporters should be looking forward to expectations of a continuing decline in the value of the New Zealand dollar. Photo / NZ Herald
Exporters should be looking forward to expectations of a continuing decline in the value of the New Zealand dollar. Photo / NZ Herald
Cut to official cash rate by Reserve Bank speeds fall in the currency.
Reserve Bank governor Graeme Wheeler and exporters alike will be taking some comfort from the devaluation of the New Zealand dollar over recent weeks and analysts are calling it lower still.
The catalyst for the latest shift lower was the Reserve Bank's surprise 25-basis-point rate cut on June 11. Thecentral bank specifically singled out the sharp decline in dairy prices for comment in its monetary policy statement, and once again said the currency was overvalued.
Charts of the kiwi against all the currencies of New Zealand's main trading partners show a currency in retreat.
In most cases, the pace of decline sped up after the Reserve Bank's statement.
Since April 30, the currency has dropped 9.5 per cent against the all-important US dollar - a key currency for the beef export and dairy trade - to US69c by yesterday.
Over the same time, the kiwi's value against the euro - important for the sheepmeat and horticulture trade - has dropped 10.3 per cent to 61c.
For manufacturers - many of which have Australia as their main export market - there were also signs of relief, the cross rate dropping by 7.7 per cent since April 30 to be at A89c yesterday.
Against the currency of New Zealand's biggest partner, China, the kiwi has dropped by 9.1 per cent over the same period.
Even against the long-suffering yen - an important currency for horticulture - the kiwi has fallen by 6.8 per cent since April 30 to 84.8.
The kiwi has for years been stubbornly high against sterling, often trading at over 50p, but has fallen 12.3 per cent since April 30 to 43p yesterday.
Since the Reserve Bank's June 11 missive, the NZ dollar's trade-weighted index, which measures the currency against those of New Zealand's main trading partners, has fallen by 4.2 per cent to 71.80.
Currency strategists expect the kiwi to move lower still but, as always, much depends on the fate of the US dollar - if the greenback gets another boost, the kiwi's decline will speed up, but if it falters, the kiwi's decline will slow.
ASB Bank rural economist Nathan Penny said the kiwi had in the past held firm in the face of faltering commodities prices.
Reserve Bank governor Graeme Wheeler.
Economic strength in the construction sector, the rebuilding in Canterbury and Auckland's buoyant property market had prevented the currency from going as low as it should have gone if commodities prices alone had been the sole driver.
"Now that the Reserve Bank has pulled the trigger on interest rate cuts, the currency has moved into line with where commodities prices are, so that's a better fit," he said.
Currency strategists said that, now the Reserve Bank had specifically singled out the dairy trade, there would be more emphasis put on the twice-monthly GlobalDairyTrade auctions.
A weaker currency helps to offset lower commodity prices - when the proceeds of export sales are repatriated into a relatively higher number of New Zealand dollars when the currency is weaker.
"The other boost, which should play out over time, is that it is making our exporters more competitive relative to some of their counterparts on the other side of the world," Penny said.
The wine trade can also be expected to benefit from generalised currency weakness.
Several banks have been revising currency and interest rate forecasts after the Reserve Bank's surprise move. For ASB, the currency has already met its six-week target of US69c.
ASB, which previously had forecast a September rate cut, now expects to see one in July "and the risk of further rate cuts is rising", Penny said.
The BNZ has long held the view that the currency is in a prolonged downtrend. "The currency is essentially cyclical and it has just experienced a very strong period of the cycle," said Kymberly Martin, senior market strategist at BNZ.
BNZ has revised its year-end forecast for the kiwi down from US70c to US68c. By the end of next year, it expects to see the kiwi at US66c.
Much of the currency's future direction will depend on how aggressively the Reserve Bank cuts rates in the future.
"Having delivered that cut [to 3.25 per cent], we really don't see the bank dallying around and our view is that they may follow up quite quickly with another cut," Martin said.
Much will depend on the US Federal Reserve and when it finally opts to start raising official rates. Market expectations are that it will do so by the end of the year.
When that happens, the US dollar is expected to get a boost, which would further assist the New Zealand dollar's devaluation, analysts said.
