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!

Monetary policy: Aussie vs NZ

At least one Australian and one New Zealand commentator feel that the RBNZ is too focused on inflation. They use the example of the RBA, which seems to be controlling inflation without trying to strangle the life out of the economy.

Do people agree with this? Is our Reserve Bank an inflation zealot? Or does our Reserve Bank have a better idea of the long-term costs of inflation, and as a result, is more interested in stamping it out?

I’m not even sure that the situations are comparable, Australia’s growth rates and productivity rates have far outstripped ours, giving their Reserve Bank more leeway to control inflation. After all March non-tradable CPI inflation was only 3.5%pa in Australia, compared to 4.0%pa in New Zealand, indicating a significant difference in domestic price pressure.

Over US$0.80 we go

So, we broke 80cents US last night, on the back of expectations that the RBNZ will increase the OCR on July 26th. This led to the Dominion post terming us the strongest-performing currency in the world

Should the government intervene here? Is this a market failure caused by speculators and Japanese housewives that don’t understand the true risks?

I’m willing to stick my neck out here and say, I don’t think a strong exchange rate is that bad. Sure, non-food manufacturing is struggling, but no matter what the exchange rate is non-food manufacturing tells me they are struggling. A strong exchange rate keeps firms costs down, which has allowed domestic firms to increase margins without increasing prices, thereby removing a hell of a lot of inflationary pressure.

I believe the strong exchange rate is built on strong economics fundamentals (such as strong or improving commodity prices, and high interest rate relative to the rest of the developed world and a weak US economy), and I don’t think the current level is the end of the world, and I’m willing to bet that the manufacturers who are telling us it is are bluffing.

However, I know a lot of people will disagree with me. If so, tell me how and why you would intervene to change the currency (bonus points to anyone that tries to say lowering the OCR will reduce inflationary pressure, that cracks me up).