A little bit of risk is a dangerous thing

So, our dollar has fallen 5% against the US, and 8% against the yen in the last few days. While some people may think that the prospect of no more interest-rate hikes is the driver, the truth is that market participants have become a bit more risk-averse.

A little bit of wobblying in the US stock markets, and suddenly a bunch of people have decided to unwind carry trades, and as we are the number one carry trade country, our exchange rate eased. That is why we are only down by 2% against the Aus$ since Thursday, they were a carry trade currency as well.

I expect us to stay around in the mid-70’s, we might even climb up a bit against the US. After all, this new found risk is based on subprime lending worries in the US, and the fundamentals of the strong NZ$ (high interest rates, strong commodity prices) are still in place. However, if asset prices (especially housing) start to ease too quickly, our exchange rate might be in for a bumpy ride.

A Strict Application of “Kiwi Made” Actually Hurts Our Exporters

While I am all for supporting the domestic economy, I think that a strict interpretation of the requirements for a good to be labelled “Made in New Zealand” actually harms our exporters. People get upset when they find out that something that is “Made in New Zealand” is manufactured using inputs purchased from another country. Any attempt to put pressure on exporting firms to use entirely NZ inputs is detrimental given that we are a small open economy with a very volatile exchange rate. The argument I’m making has absolutely nothing to do with price or quality but instead centres on a corporate finance concept known as “Natural Hedging”. Put simply if you have a company that sells its output in a foreign currency, purchasing your inputs in that currency naturally hedges movements in the exchange rate.  A good example of this is Navman who appear to be doing fine because they purchase a lot of their inputs in US$

While I accept that a good should still in essence be New Zealand made, I  believe that when the firm is an exporter, they should outsource as much of their inputs as possible.

Why the Exchange Rate Makes Me Smile

So the exchange rate has reached record highs much to the despair of the government, reserve bank and local exporters. There is one sector of the economy that is poised to benefit from this though…. ME

Given all the noise coming from the government about the exchange rate being overvalued and the fact that the reserve bank intervened when the dollar was still below $0.80, I’m thinking it’s a fairly safe bet that over the medium-long term the dollar will come back down. With that in mind, now is fantastic time to buy overseas shares and reap the gains as you ride the dollar back down.

It’ll also be a nice self fulfilling prophecy if will all start sending money overseas, we believe the kiwi dollar is going to fall so we dump it which causes it fall. Think about it, you could actually be helping our exporters by investing in foreign companies, I’ve never felt so good about not investing in the local economy!