Crunching the currency

June 2nd, 2011 at 4:09 pm by David Farrar

In my blog, I take a look at the currency, with the record highs against the US and UK. I concluded:

Politically the currency can have a big impact on the economy and the popularity of the government. But it is not something governments can do a lot about in the short term, unless they want to risk billions of dollars in currency speculation. Long-term policies that lead to better productivity can lead to a stronger currency, but in a way which doesn’t harm the export sector so much, as the increased productivity gives them competitive advantage. That is how you get a win-win.

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17 Responses to “Crunching the currency”

  1. starboard (2,537 comments) says:

    I dont have a problem with the high currency. Im not an exporter for a start. Those who are moaning about it should have hedged. Long may it last.

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  2. starboard (2,537 comments) says:

    ..and cheaper petrol , flatscreens , travel..woo hoo !!!

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  3. Johnboy (16,554 comments) says:

    The BMW 650i Convertible seems like a good buy at the moment then.

    I’ll just have to see if I can get a couple of ewe’s in the boot I suppose. :)

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  4. Anthony (796 comments) says:

    You should be advocating the repeal of the Approved Issuer Levy (AIL) which exempts banks from deducting withholding payments from the interest income of foreigners. AIL gives a tax break to foreigners who lend us money so increases the attractiveness of the NZ dollar. Get rid of this tax break and the dollar could well fall a little.

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  5. david@tokyo (263 comments) says:

    Those people whinging about NZD strength need take a glance at the USD/JPY, USD/CHF historical charts (in addition to the Aussie cross mentioned), the problem will become clear for anyone with functioning eyes. The global economy doesn’t revolve around NZ and the NZD. Same with the UK, except the Brits haven’t been printing as much money as The Bernanke.

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  6. Jeff83 (745 comments) says:

    Tbh there is no way NZ would have the ability to drive the currency down. It is being driven off weakness in the UK and US economies and the comparative strength of the Australian economy. For better of for worse our currency is hitched to the Aussies. Accordingly the strong devaluation of the NZ currency which should of happened has not.

    Its also worth noting both the US and UK have devalued their currency using quantitative easing, an option not avaliable in NZ either due to high inflation pressures.

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  7. tom hunter (4,843 comments) says:

    It’s not going to stop yet.

    This was already posted by somebody else here today – but it’s more appropriate to this thread anyway.

    Peter Schiff on the gathering US economic storm

    I do hope all you people have reduced your debt as far as possible, but I figure we’ve got until early 2013 because the Fed really will not want to be blamed for throwing the 2012 Presidential election. Say hello to QE III.

    I should add that the link is to the Not PC site and also contains a 14 minute clip from an Australian documentary on the Chinese “Ghost Cities” – as clear a signal of gigantic mal-investment as is possible to get. China’s not going to rescue the world.

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  8. david@tokyo (263 comments) says:

    Ironically, despite high inflation in the UK, they do actually have one chap on the BOE monetary policy committee who wants to do more QE…

    I’m not an economist, but I know I’d feel better about economic prospects once interest rates do get lifted up off record low emergency settings – even if just a notch.

    It’s not like QE and low interest rates has really helped Japan’s economy.

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  9. tom hunter (4,843 comments) says:

    It’s not like QE and low interest rates has really helped Japan’s economy.

    Indeed. But given the lack of reporting on Japan, how many people even know that the Central Bank of Japan has had interest rates set at 0-1% for almost two decades now? And “stimulus” spending of course.

    It does not fit the Keynesian narrative.

    But lets face it – our political class largely have no idea either. Certainly not Jum Anderton and his ilk. That idiot was still raving about the wonderful government-business approach of the Japanese in 1999, when the broken nature of that model has already been apparent since ’92/’93.

    Sadly there’s a lot more like him in NZ.

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  10. double d (225 comments) says:

    as an exporter …. it is never about the level.

    it is about the volatility.

    we can live with a level as long as it doesnt jump about.

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  11. rakuraku (162 comments) says:

    The reason the currency is rising is the currency markets are speculating on the big sell off of NZ Assets and the high demand for NZ Assets by our Asian Brothers hence the demand for NZ currency.

    NZ is paradise for overseas immigrants however I think we should be looking after our own people first, how do young people in NZ especially Auckland afford a home when you are competing against hot Asian money out of China, our young people don’t have a shit show.

    I thought when Jimmy Bolger set up the big Asian Invasion they had to bring in 500k plus to invest in productive investments in NZ all we have imported in NZ is an Asian fuelled speculated property market, which has disenfranchised average New Zealanders.

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  12. SPC (5,619 comments) says:

    One factor behind the high currency is capital inflows – our foreign borrowing to fund debt.

    Another factor is capital inflows – if foreigners can buy farm land and make an untaxed CG they will. But this investment inflow places upward pressure on farmland prices and bids up the cost of a productive asset. While it provides a CG to farmers selling up, it also means higher borrowing from those buying the farms (increasing foreign debt and placing more upward pressure on the currency).

    The same forces operate in the housing market when our banks borrowing from offshore lend freely to locals bidding up the prices of houses.

    The RB Governor can best provide some mitigation from the foreign financing of debt impact on the currency value by trying to constrain bank lending to home buyers and farmers in ways other than raising the OCR. If he does not, then as our OCR rises we shall return to the 90cents Oz cross rate norm – that means 90 cents US.

    The government would help if it limited the foreign buy up of local assets

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  13. Anthony (796 comments) says:

    Tom, those videos are quite scary and reminds me why I have held off starting my KiwiSaver account – because the markets have seemed overvalued ever since about late 2009.

    All this relying on capital gains is bad and it’s just crap to say that taxing them is too difficult!

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  14. rakuraku (162 comments) says:

    The big problem is we have a speculative currency which the skilled currenct traders love, they can push it around like a football.

    Also we have a stable country with a basically sound agricultural economy so the currency is just a play thing for overseas currency punters, one large overseas financial institution can actually push our currency in which ever direction they want it to go.

    NZ houses and dairy farms are small change to wealthy overseas investors however we are effectively selling our grandchildren’s future down the road selling these offshore, as people in this country do not have the ability to earn the money to buy houses and dairy farms unless they secure a good job or receive funds through established family wealth.

    I don’t know the answer but i do not think we should be selling our houses to Chinese property speculators/investors who have cranked NZ property prices over the past 20 years, fine for the baby boomers who own 20-30 houses each but what about young people wanting to buy their first home. Try buying a house in China or Japan.

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  15. berend (1,709 comments) says:

    DPF: But it is not something governments can do a lot about in the short term,

    The dollar is high BECAUSE the government is borrowing so much. It’s high because of John Key’s actions.

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  16. Tauhei Notts (1,713 comments) says:

    Anthony at 7.34 p.m. yesterday; = spot on.

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  17. wreck1080 (3,917 comments) says:

    My income has nearly halved due to the exchange rate drops.

    When the pound went to .42 i was amazed.

    When it hit .5012 it is just unbelievable.

    I completely blame government borrowing.

    Borrowing 400 million dollars a week of borrowing puts commodity prices and chinese non governmental investment funds to shame.

    @starboard:: Hedging is a temporary solution to smooth out short term rate fluctuations. It is certainly not a way to solve long term trends. Just remember, the higher our currency goes now, the more it will plunge when the tables turn (and they will). How’d you like $4 petrol?

    Just wait until the govt starts repaying debt, they will be selling NZD like crazy to repay our debt…..they will also allow other policy factors to reduce currency such as the US has done to minimise foreign debt. Fascinating game, but, people like me are really hurting (relatively).

    I just laugh now when exchange rate hits new highs. The good thing is i pay less tax.

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