Parity in sight?

April 7th, 2015 at 3:00 pm by David Farrar


The NZ dollar got to 99.8 vs the Australian dollar yesterday. Parity may not be far off. Even in the days before we floated the dollar, we were not at parity. The Reserve Bank data goes back to 1973 when we almost made parity. Since 1993 we’ve been at least 75 cents but never over 95 cents until recent months.

As I’m currently in Australia, it’s great basically not having to convert prices.

Dollar at four year low

January 30th, 2015 at 9:00 am by David Farrar

The Herald reported:

The New Zealand dollar dropped, touching a four-year low, after the Reserve Bank abandoned its bias for raising interest rates and said a rate cut was a possibility.

The kiwi fell to 73.27 US cents at 5pm in Wellington and earlier fell as low as 73.18 cents, from 74.52 cents late yesterday. The trade-weighted index declined to 75.83 from 76.79.

Not that long ago some politicians were demanding that the Government intervene and presumably spend billions trying to move the currency level. This is a good reminder how variable the exchange rate can be, and that calls for the Government to intervene are silly and potentially very costly.


Think how much money you can lose by trying to manipulate the exchange rate to get it to the level some politician thinks it should be.

NZ vs AU dollar

January 1st, 2015 at 1:00 pm by David Farrar

The Herald reports:

The New Zealand dollar rose to its highest against the Australian dollar since the Aussie was floated in 1983, as investors favour the outlook for the New Zealand economy where interest rates are set to rise further, compared with Australia where rates may fall.

The kiwi touched 95.93 Australian cents overnight, and was trading at 95.64 cents at 8am in Wellington, from 95.61 cents at 5pm yesterday.

Here’s what the NZ dollar has done vs the AU dollar since floating:

au dollar

Parity is not far off, but is a tough psychological barrier to beat.

NZ exchange rate

July 9th, 2013 at 9:00 am by David Farrar



So we’ve had politicians complain for the last year that the exchange rate is too high and that the NZ Government must either print money or spend billions intervening in the exchange rate to lower the dollar.

Stuff reports:

Mike Jones, a currency strategist at BNZ, said he expected the kiwi to trade between US76c and US80c in the next three to six months, based on the gyrations of the global economy.

But the general rule at the moment is based on a simple formula: the better the economic data out of the United States, the further the kiwi will fall.

Which is why calls for us to intervene are misguided. It’s like trying to stop a river with a couple of stones.

Print baby print

May 25th, 2013 at 6:25 am by David Farrar

Stuff reports:

Economist Ganesh Nana wants the Reserve Bank to intervene in foreign exchange markets for as long as it takes to bring the kiwi dollar down.

The Berl economist told deer farmers in Wellington the bank should become a daily trader till the exchange rate fell to “something sensible for our export sector”.

The dollar has traded close to US86c recently, falling to almost US80c this week, before rebounding to about US80.9c yesterday.

“Sooner or later the speculators – Japanese housewives and Belgian dentists – will find somewhere else to play.”

That may be one of the most risky and/or stupid strategies I have ever seen. In fact the more a Government intervenes in a currency, the greater the profits are for those speculating against it.

I can think of several countries that have tried that strategy – and all have lost.

The reason why they played in New Zealand was because they knew it was an easy win.

Asked if New Zealand had the resources to do this, Nana replied, “It’s called a printing press. I’m not kidding,” he said to laughter.

“You can afford it. The Government has the legal right to print as much dollars as it likes.”

The Green Party policy. Just print as much money as possible.

It certainly would lower the dollar.

It will also increase prices and bring  back rampant inflation.

Reserve Bank intervenes in currency markets

May 8th, 2013 at 3:23 pm by David Farrar

NBR reports:

The Reserve Bank says it intervened in foreign exchange markets in an attempt to drive the kiwi lower. It gave no details of the size of the intervention.

The kiwi tumbled to 83.90 US cents from 84.48 cents before governor Graeme Wheeler’s comments were telegraphed at the finance and expenditure select committee in Wellington. The trade-weighted index dropped to 77.71 from 78.17.

The comments come after Mr Wheeler said in a briefing for the six-monthly financial stability report today that the currency was “significantly overvalued”.

“That intervention will not materially change the level of the exchange rate but could take potentially the tops off rallies,” Mr Wheeler told the committee. “In terms of activity, there’s been an intervention.”

The size of the bank’s action would show up on its balance sheet, deputy governor Grant Spencer told the same meeting.

This is an independent decision of the Governor. It has happened once or twice before. I am skeptical of the ability of the Reserve Bank to move the level of the NZ dollar in the long-term as our reserves are much smaller than others. However if they have correctly calculated that the currency is over-valued, then they may take the edge off the dollar without it costing taxpayers money.

As I have said previously, I think the issue is more the weakness of the US dollar and the Euro, not the strength of the Kiwi.

US dollar

April 11th, 2013 at 11:00 am by David Farrar

Stuff reports:

The New Zealand dollar is eyeing the US86-cent mark today as it continues its relentless drive upwards.

Actually it is more a relentless drive down by the US dollar. The Australian dollar is now worth more than US$1.05 and the NZ dollar is still historically low compared to the Australian dollar at 81c.

We could join the US and Europe and Japan in printing more money to devalue our national wealth. But guess what – that just makes us all poorer, and will make the wage gap with Australia even bigger.

IMF on monetary policy

March 21st, 2013 at 1:00 pm by David Farrar

The Herald editorial:

It is always useful to get a global perspective on issues that are the subject of local political wrangling. Light is generally shed on areas that may be clouded by the heat generated by debate. In that context, the International Monetary Fund’s annual report on the New Zealand economy is timely. It casts an especially valuable eye over the two questions of most current angst and anxiety, the significantly overvalued dollar and the overheated Auckland housing market. Its conclusions should put an end to much of the irrational comment on how these issues should be addressed.

The IMF says there should be no “messing with” the monetary policy framework just because the dollar is temporarily overvalued. Indeed, that framework, including a flexible exchange rate, was one of the reasons New Zealand had been relatively resilient in the face of the global downturn. “Do you want to mess [with] the framework because the exchange rate at the moment is overvalued, and do potentially long-term damage? I would be very reluctant to go down that path,” said Bruce Aitken, the head of the IMF team.

We are a minnow. To think we can unilaterally change our exchange rate is silly. You can do it by printing more money of course, which is a great way of making the entire country poorer.

That represents a strong riposte to politicians who have sought to reap advantage from manufacturers’ grievances over the high dollar. It confirms the dangers inherent in, for example, the Greens’ call for the exchange rate to be part of the Reserve Bank’s mandate. The lower interest rates that flowed from this would, as the IMF notes, remove an advantage held by New Zealand’s central bank. Unlike its counterparts in several nations, it still has the scope to cut interest rates if the country were hit by another major shock. Greens co-leader Russel Norman has accused the Reserve Bank governor Graeme Wheeler of complacency and being stuck in the 1980s. This report confirms that Dr Norman’s credibility is under far greater threat.

The Greens are almost the only party in the western world calling for printing money, when the official cash rate is still well above zero. Quantitative easing is the last resort, not the first resort. They just want to print money to pay for their promises.

The problem is not so much the NZ dollar is too high. The US dollar and Euro are tanking because a generation of borrow and spend policies are crippling them. By contrast we are historically low against the Australian dollar.

The problem for Shearer

March 21st, 2013 at 11:00 am by David Farrar

The undisclosed bank account is posing some challenges for David Shearer, beyond just the transparency issue.

Stuff reports:

Shearer told Fairfax Media yesterday there was no advantage to having the account and there was “nothing special about it”.

Asked what that said about his financial expertise, given low interest rates in the US and the exchange rate losses he may have suffered from a rising New Zealand dollar, he shrugged and said: “The bottom line is it is there, and I have nothing more to say about it really.”

Banks today also questioned why Shearer would keep such a large amount of money in an account that paid such low interest – maybe 1.5 per cent – when he could earn more in New Zealand.

Shearer had also disclosed a mortgage in the register, which would charge a higher interest rate than the banks paid on deposits in New York.

“Why doesn’t he transfer some across and pay off his mortgage?” Banks asked.

How an MP arranges his or her personal finances should generally be of no concern to the public – it is a private matter. But when due to a stuff up, you force it into the public arena, people naturally get curious. You just can’t help it.

Now some people have got over-excited and have been saying that Shearer has a conflict of interest with Labour’s policy to spend billions of dollars pushing down the exchange rate, as that would allow him to convert his US dollars into NZ dollars at a higher profit.

I’m sorry, but that’s ridiculous and is the sort of paranoia best left to some of the extremists on the left who likewise allege that John Key was asking questions in Parliament on Tranzrail to help their share price, rather than because he was (then) Opposition Finance Spokesperson.

Labour want to waste billions of dollars intervening in the exchange rate because they think it will be popular, not to help their leader make money on currency transactions.

So I don’t think the public will have a bar of the conspiracy theories.

But what the public do understand is paying down your mortgage. It’s something common to most families. You pay much more on your mortgage than you get in a bank, so you always transfer surplus savings against your mortgage.

And what the public will be wondering, even though it is none of their business, is why would you have several hundred thousand dollars in an US bank account, and not use it to pay down or off your mortgage. I mean no one sensibly wants to pay more interest to your bank than they have to.

The only three answers I can come up with are:

  1. You’re financially incompetent and it never occurred to you.
  2. You’re so well off, that saving thousands or tens of thousands of dollars off your mortgage doesn’t matter in the bigger scheme of things.
  3. There is some other reason to want to keep the money in the offshore account.

Have I missed a significant possibility?

Vernon Small also touches on the political side of the non disclosure:

The blunder shows a slackness and a lack of attention to detail unbecoming a prime minister.

Even having the account – rather than closing it quick-smart when he became leader – is problematic.

What of Labour’s views on economic nationalism? What about investing in local enterprises rather than leaving the money at low interest rates to be invested in the US?

And why not close it and bring it back now? Surely not because he is waiting for the exchange rate to move back in his favour? Mr Shearer, currency speculator?

It isn’t necessary to get overexcited by the ramifications of all this to see the potential for political harm for Labour and Mr Shearer.

By far the worst is that at a stroke he has neutralised attacks he could make, come the 2014 campaign, on John Key’s “brain fades”.

It is not hard to see how they will be turned back on him.

Which is worse: forgetting a swift mention of Kim Dotcom in a briefing by spooks or failing to remember for three years in a row your nest egg tucked away in a New York bank?

Labour had a very obvious campaign around Key having so called brain fades. It is now in tatters.

UPDATE: We have has some useful additional possible explanations. The list now is:

  1. You’re financially incompetent and it never occurred to you.
  2. You’re so well off, that saving thousands or tens of thousands of dollars off your mortgage doesn’t matter in the bigger scheme of things.
  3. Deliberately not paying off the mortgage, so he appears “an everyday bloke”
  4. Is writing the NZ mortgage payments off tax as an investment property
  5. Waiting for the exchange rate to drop, before he moves the money back to NZ
  6. There is some other reason to want to keep the money in the offshore account (US itunes purchases?)


February 8th, 2013 at 4:00 pm by David Farrar

Brian Fallow writes at NZ Herald:

The New Zealand dollar has hit 76 on the Reserve Bank’s trade-weighted index, its highest level since at least 1990.

Surely that means manufacturers have a point when they plead for a defensive response from policymakers at the bank or in the Beehive?

Only up to a point.

The TWI is highly unlikely to reflect the exchange rates relevant to any particular manufacturer, either exporting or competing with imports.

For many the US dollar will be much more significant than its 30 per cent weighting in the TWI.

For others the Australian dollar is far more important than its 22 per cent index weighting.

And remarkably, the TWI, whose composition was last revised in 1999, does not include the renminbi even though China is now New Zealand’s second-largest export market and largest source of imports.

I’d say time to reweight the TWI. However as the Chinese currency is not a floating one, there may be issues with including it.

Helpfully, though, the ASB Bank economists have compiled two alternative exchange rate indices, weighted by manufacturing import and export flows.

They define manufacturing narrowly, excluding the output of dairy factories and meat works, so as to reflect the position of more value-added, or in the jargon of statisticians “elaborately transformed”, manufactured goods. Such goods represent about 19 per cent of exports and 51 per cent of imports.

Like the official index, it includes five currencies, but with the renminbi replacing sterling.

During the last cycle – from the recession at the start of the millennium to the more recent one – the three indices tracked each other quiet closely.

But since 2009 they have diverged.

All three have appreciated, but the index reflecting manufactured imports less so than the official TWI, and the index for manufactured exports less still.

The result is that the ASB exchange rate indices for both manufactured exports and imports, and especially the former, are even now at levels lower than they were during the boom years of the mid-2000s.

I wasn’t aware of the ASB indices. It makes more sense to use them when referring to the impact on manufacturing than just the US dollar or even the TWI.

ASB chief economist Nick Tuffley says the fact that the manufacturing-relevant exchange rates have not climbed as much as the official TWI highlights a key difference between the most recent appreciation compared with that of the early to mid-2000s.

“In the 2000s the New Zealand dollar appreciated more broadly, that is, against most major currencies and to a similar degree against each. Since 2009, though, it has held broadly stable at a low level against the Australian dollar.”

Australia is the destination for nearly half of New Zealand’s manufactured exports.

A point I made the other day.

Guest Post: Our high exchange rate

August 3rd, 2012 at 11:00 am by David Farrar

A guest post by Anthony Morris:

There is something we could do about our high exchange rate

New Zealand hasn’t paid its way in the world since 1973. Every year since then we have had to take on extra debt and sell off assets to fund the gap between our exports and imports. Yes, the Government had paid off most of its debt before the global financial crisis hit in 2008. This means government borrowing is not high by international standards despite recent increases. However, private sector external debt is worryingly high.

The Reserve Bank recently looked at our net international investment position as a percentage of GDP, and came up with a figure of negative 86% as at 2008. Against a selection of 21 OECD countries New Zealand was 18th with only Portugal, Hungary and Iceland having a worse position. Even Greece appeared to be in a slightly better position than New Zealand in 2008! See

New Zealand has got into this position because we have had a chronically over-valued exchange rate. Year after year our export revenues have failed to cover our imports.

The high exchange has been blamed on the Reserve Bank since it became independent in 1989. Apart from some supervision of financial institutions, the Reserve Bank’s only task has been to keep inflation under control and its only levers for the job have been monetary ones. Relatively high interest rates have been required to tame inflation and a side effect has been a high exchange rate as foreigners have rushed to deposit money in New Zealand.

However, there are other factors that affect the exchange rate. The attractiveness of foreigners lending money to New Zealand financial institutions depends on the whole return and not just the ‘raw’ interest rate. Tax can be withheld from the interest paid. New Zealand’s tax treaties allow for a 10% or 15% interest withholding tax.

However, since 1991 the approved issuer levy (AIL) scheme has allowed financial institutions to pay a 2% fee in return for not having to deduct any withholding tax from the interest on foreign deposits. Recently the Government has gone even further and lowered the levy to 0% in some cases. Meanwhile, New Zealanders have tax deducted from the interest on their savings at their marginal tax rate, which for middle to high income earners is 33%.

It is no wonder we have high capital inflows funding our way in the world when we go out of the way to make it attractive for foreigners to put their savings here but not for New Zealanders to save. Other countries have implemented various measures to discourage passive investment from foreigners because they know it pushes up the exchange rate and harms the productive parts of the economy. Here in New Zealand we don’t seem to care.

I suggest that the solution is to allow the Reserve Bank some control over the level of tax on interest payments, and to give it an objective that incorporates sustaining economic growth for the long term benefit of New Zealanders. If AIL was abolished and we went back to an interest withholding tax of 10 or 15% on foreign deposits then the demand for the $NZ would likely to drop a little and the exchange rate fall. This would make imports more expensive and exports more competitive, helping the balance of payments.

Discouraging the inflow of foreign savings could encourage banks to raise their deposit interest rates to raise more money, which would tighten monetary conditions. However, the Reserve Bank can ease monetary conditions if it thinks they are too tight. It has various tools like the official cash rate which effectively allow the creation of more money.

The global financial crisis did disrupt the power of the usual monetary instruments. In some countries, central banks had to turn to new instruments such as quantitative easing (essentially printing money) to increase the money supply. Quantitative easing definitely creates more money without having to borrow it from foreigners!

Making monetary conditions too loose causes inflation and I am not advocating that. But why borrow overseas when more money can be created internally?

Prior to their entry into the Euro zone the Greeks tended to have high inflation and a depreciating currency, no doubt from loose monetary conditions to grease the wheels of their economy. In recent times the Greeks couldn’t do anything to create extra money internally to help fund their excess consumption so had to borrow externally. That is why they racked up huge debts to foreign banks which they now can’t pay back.

It seems ludicrous that NZ should be getting itself into a similar situation to some European countries like Greece (in having high foreign debt) when we have our own currency, our own central bank and a reasonable tax system! It is simple economics to lower the demand for $NZ to lower the exchange rate to stop the need for foreign borrowing. That could, however, mean a fall in living standards as those big screen TVs become more expensive. I suspect that is the real reason why no one wants to bite the bullet and give the Reserve Bank the powers and responsibilities I am suggesting. Just like the Greeks of several years ago, we like to think the day reckoning will never come!


The unstoppable Kiwi?

July 23rd, 2011 at 12:00 pm by David Farrar

Christopher Adams at NZ Herald reports:

Currency experts are not ruling out the possibility of a seemingly unstoppable New Zealand dollar reaching parity – or equal value – with the US currency.

That would be great news for Kiwis planning a trip overseas, but a nightmare situation for many exporters. And adding to the pain, the kiwi is also making ground against the Australian dollar.

So where is the NZ$ against various currencies. Let’s take them in turn.

US – currently at 86.22c. Previous high (before 2011) was 81.76 in 2008.

UK – currently at 52.83p. Previous high (before 2011) was 49.94 on 31 Dec 2010

AU – currently at 79.58c. The high was 95.54c in Dec 2005 so a long way off the high

JP – currently at 67.67. The high was 97.62 in Jul 2007 so huge way off the high

EU – currently at 59.83c. The high was 60.92c in Dec 2005 so close to the high currently.

TWI – currently at 73.7. The high was 76.9 in Jul 2007 so some way away from the high

I still regard this as more of a story about the US and UK currencies being so weak because they have such huge fiscal deficits, than about the Kiwi being unstoppable.

Crunching the currency

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

In my Stuff 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.

The exchange rate

March 4th, 2009 at 12:13 pm by David Farrar


Very weird to go from breaking 80c for the first time in decades, to dropping below 50c in under a year.

I hate it when things start to cost more.

The biggest drop ever

October 30th, 2008 at 10:08 am by David Farrar

It has recovered to 59c today, due to action in the US but that has to be the largest and steepest drop since the dollar floated.

Dollar plummeting

October 9th, 2008 at 10:03 am by David Farrar

Down to 60c. Farmers will be happy but this means more price increases for most Kiwis.

Our largest currency speculator

July 2nd, 2008 at 2:16 pm by David Farrar

Ben Thomas at NBR reports on how the Reserve Bank has gambled a massive $4.2 billion on currency speculation in the last year.

This has all been through way of sales of NZ dollars. The Reserve Bank is hoping it can then buy the dollars back in the future when the exchange rate is lower.

I have to say I prefer to do my own currency speculation, rather than have the Government do it for me.

Employment declines

May 8th, 2008 at 2:08 pm by David Farrar

Today’s release of the March 2008 Household Labour Force Survey confirms that there is a downturn, with the first significant decrease in jobs since the Asian Crisis of 1997/98.

Now Labour in the 1990s tried to blame all of that downturn on the then National Government. I prefer a more rational analysis, and both National in 1997 and Labour in 2008 can’t be primarily blamed for what is essentially a global problem. However both Governments do have responsibility to have the economy as free and resilient as possible to mitigate the effects of global events.

So what has happened in the last quarter:

  • Those in employment have dropped on a seasonally adjusted basis by 29,000, wiping out the gains since December 2006
  • The number of people unemployed rose by 4,000 – a 5.2% increase from 77,000 to 81,000
  • The number of people not in the labour force increased by 35,000 – so these are people no longer looking or available for jobs. The labour force participation rate has dropped to 67.7% – at least a two year low.
  • Most of the fall in employment has been amongst under 25s
  • Unemployment rates (non seasonally adjusted) by ethnicity are Europeans up from 2.2% to 3.0%, Maori from 7.2% to 8.6%, and Pacific from 4.8% to 8.2%
  • Wellington appears to have the largest rise in unemployment – from 2.5% to 5.0%
  • The total number of jobless people (this includes those not available or looking for work) rose from 145,900 to 181,800
  • The number of actual hours worked in the quarter is the lowest since March 2005

Now I think the HLFS has exaggerated the decline somewhat. The HLFS is basically just a big opinion poll. It has a large sample (17,000 off memory) but that still leaves a sampling margin of error. I don’t think there has actually been 29,000 jobs go in the last quarter. But certainly there has been some decline.

The above graph, at The Visible Hand in Economics, shows the market reaction. The concern is not over the decline, as much as the size of the decline.

The only good news is that the chance of a lowering of interest rates this year is now higher. But food and fuel inflation will still make this a risky call to make too early.

Blog Bits

April 10th, 2008 at 2:26 pm by David Farrar

No Right Turn blogs that he believes the NZ First advertisements do breach the Electoral Finance Act as “a reasonable person would regard it as an encouragement to vote for NZ First”. I agree. As Idiot/Savant says it is not a survey, it lays out policy and encourages approval of it.

Poneke has more on the BBC story on climate change which got modified. The reporter denied he did it under pressure, but an activist has blogged she successfully pressured him to change it.

The visible hand in economics looks at fixed vs floating exchange rates.

The DAFT Party has a solution for China over Tibet. It is to rename China to Tibet, and declare they are all Tibetians. The PRC Government should see the sense of this now they are running a market economy – you replace a tarnished brand with a more positive brand!

Bernard Hickey has video and a blog post on Alan Bollard’s speech suggesting we are talking ourselves into a recession. Bernard says we’re not, and if we do have a recession, it is because we deserve it! Them’s fighting words! It’s a lengthy excellent post with many graphs.

A new high for the dollar

February 26th, 2008 at 9:21 pm by David Farrar


The NZ$ hit a new high against the US$ dollar today. The above graph shows monthly averages except for Feb 08 which is yesterday’s peak.

NBR and NZPA report that we hit 81.5c and some traders are picking 90c.  Earlier forecasts were for a peak of 83c to 95c though.

Also of interest is  Westpac is picking the Reserve Bank to increase interest rates twice this year. Ouch. But an interesting call from the Canterbury Manufacturers Association for a variable rate compulsory superannuation saving scheme. So when inflation starts to increase, you increase the compulsory deduction rather than put interest rates up.

It’s a nice idea but will only affect personal consumption but business activity, so I am unsure whether it would be as effective as the cash rate.  But just like Don Brash’s suggested variable petrol tax – it would be good to model.