There was an interesting little shift in the dollar recently – one that was a little bit surprising at first look.
In the past month the dollar has been falling, first as a result of the Canterbury earthquake, then due to the 50bp cut in the official cash rate by the RBNZ. This all makes sense. But then the dollar dropped very sharply from around the 15th of March – this was well after the MPS, and nothing had happened in NZ. What was going on?
To start off with I have to admit I like Bernard Hickey. I like the fact he has got out there, written about New Zealand economic issues, and pushed to add an open debate type platform to the discussion regarding the New Zealand economy. As a result, I may have not been critical enough when I read his posts in the past – as I did not see this coming. In truth, the calls for exchange rate, trade, and capital controls is a massive step too far in what could well be the wrong direction. Let me talk about the points Hickey has raised:
One of my favourite excuses for the “high” NZ dollar is currency reserves being built up overseas (in order to “keep their currency low” they need to buy up foreign dosh, building up currency reserves you see). It is an argument the US likes to make without actually doing any analysis as well.
However, work has been done … a while back.
The linked to paper found that reserves were not excessive anywhere, expect China. A good point to keep in mind no doubt.
So, where do I get figures on Singapore refined petrol prices?
Crude oil has been falling, the exchange rate has stayed stable, but rising refining costs have driven up the retail price of petrol. If anyone knows where I can find the figures it would be much appreciated 😉
Japan’s economy contracted by 3.3% over the December quarter – a massive fall. To put this in context, the New Zealand economy has shrunk by 1% over the past nine months (to September) on the back of a drought induced recession.
On the face of it this seems scary – Japan’s economy is falling because exports are falling, implying that “world demand” is falling.
However, then I stop and think about it. Japan produces manufactured goods – these are the things that we import. A collapse in world demand for manufactured goods will lead to lower manufactured good prices – which is an effective income boost for NZ.
Furthermore, a weak Japanese economy makes NZ seem “relatively” less risky – something that could help prevent our ability to borrow from overseas from deteriorating.
This isn’t all bad news for NZ – it is possible that global “rebalancing” could work in our favour yet …
Update: Paul Walker rightly points out that Japan is a major purchaser of NZ products – implying that a slowdown in Japanese growth will hurt us. This is true. However, my view is that what matters is the “relative price” for what we sell vs what we buy. We are a small country, so what we produce can be sold anywhere – what matters is the return. With global demand slowing it could be the case that the price of manufactured goods falls further than the price of soft commodities – something that would actually provide an income boost for little old NZ.