UK analysts say the dollar is overvalued and economy like Ireland pre-global crisis

A London-based hedge fund manager says New Zealand is like Ireland pre-global financial crisis and it's only a matter of time before the Kiwi dollar plunges.

According to Bloomberg, Stephen Jen, a partner at SLJ Macro Partners and colleague Fatih Yimaz said in a note that while the "the case for kiwi seems compelling" the reality is "quite different".

"New Zealand has severe structural weaknesses that are very similar to those of crisis-hit southern European and southern emerging-market economies. Kiwi may be 20 per cent overvalued," the pair said.

While it was easy to tell a good story for the Kiwi, the analysts said, they were not convinced.


"The economy has high growth, high terms of trade, and the currency is high-yielding. However, the case for kiwi is, in our view, much less persuasive."

They told Bloomberg New Zealand's economy resembled those in Europe and the emerging market just before they were engulfed by crisis - "a growth model based on debt and credit, low savings rates, and current-account deficits".

Ireland went from Celtic tiger before 2007 to European debt-crisis victim, requesting a 67.5 billion bailout in November 2010 when the near-collapse of its banks meant bond markets were shut to the country.

But ASB economist Chris Tennant-Brown said the aspects of the New Zealand economy that were doing well were not debt-funded.

A key driver of growth this year was expected to be the Canterbury rebuild which was being funded by insurance payouts.

"I don't see a risk there from an Ireland-style debt crisis."

Westpac economist Imre Speizer said New Zealand also differed from Ireland and Europe as the New Zealand currency was free-floated and the banking sector had not got itself into trouble in the booming property market.

"The comparison to Ireland is debatable. "Ireland and southern Europe have no control over their exchange rate as they have a common currency.


"They don't have this buffer with which their economy can withstand shocks."

Speizer said New Zealand was susceptible to both downside and upside risks. The biggest downside risks were the potential for a sharp slowdown in China and for the US Federal Reserve's withdrawal of monetary stimulus.

"But that would push up the [US] dollar against all currencies - it's not a New Zealand-specific story. It would affect many currencies."

The London analysts also said facts don't support the image of New Zealand as an agriculture-based economy dominated by dairy, with agriculture accounting for only 5 per cent of the country's total gross domestic product. But Tennant-Brown said GDP only took into account what was happening on the farm. It did not include manufacturing or farm-related sales.

"It is one-third of the export story. I can't really understand how they can say the agriculture story is getting overstated."

The analysts said they saw considerable downside to the kiwi dollar in contrast to the overwhelmingly positive prevailing view in the markets.

"While there may be some temporary cyclical factors that may be supportive of the kiwi, there are serious structural demerits that will one day weigh on the kiwi," they said.

Speizer said he expected the kiwi to remain firm against the US dollar this year, rising above US84c to a potential peak of US86c but to decline against the US dollar next year as the US economy picked up.

Tennant-Brown said while the kiwi was close to a post-float high against the US dollar it was supported by the strong economy and pending interest rate rises. The kiwi was trading at US83.75 cents at 5pm yesterday.