In the past six months, the New Zealand dollar has moved almost 20 U.S. cents, touching a post-float high at the beginning of August and falling away just as quickly this month. The decisions by both Standard & Poor’s and Fitch Ratings’ to cut the sovereign rating one notch to AA have exacerbated the slide.
Even though AA credit ratings are respectable these days, especially by the standards of the shakier parts of Europe, New Zealand’s status as the proverbial cork in the global ocean means investors’ appetite for our dollars will be that much less whetted.
However, that's business as usual for the kiwi, which has a long history of racing up and down, usually over-correcting at each end of the bungee cord. For example, it tumbled from 81 U.S. cents in March 2008 to about 51 cents in March 2009 as the ripples travelled out from the global financial crisis.
The Reserve Bank's preferred measure, the trade weighted index, reached a four-year high at the start of August and has dropped about 8% since then.
What's to keep it in the stratosphere? Certainly not GDP growth, at a tepid 0.1% last quarter. And not the outlook for interest rates. Governor Alan Bollard is comfortable with the official cash rate at a record low 2.5% for now.
Bollard was vague about when he might raise interest rates in the monetary policy statement this month, saying any increases would be ‘over the coming year or so’. Three months earlier he gave the impression a 50 basis points hike to the OCR of 50 was imminent. He'd cut the rate that much on March 10, after the Feb. 22 Christchurch earthquake, and having seen the economic impact of the disaster was mostly contained in Canterbury, declared in June that such emergency monetary help was no longer needed.
Yet in the latest MPS, he has trimmed his projected track of the 90-day bank bills, a market proxy for the OCR. He now sees rates for such short term money rising to 4.3% by March 2014, compared to the 4.9% rate forecast in the June statement. At the same time, he sees the TWI falling less - to about 69 in the first quarter of 2014, about where it is now. Three months ago he was projecting it sinking to 66.
The economy will get a fillip from the Rugby World Cup and the rebuild of Christchurch, but it is possible to over-state the overall impact of repairing earthquake damage. Construction firm Fulton Hogan says it is possible its business in other regions will suffer as more funds are directed to Canterbury.
The elephants in the room are Europe and the U.S. Can Europe's leaders get on the same page long enough to ensure the region's sovereign debt crisis doesn't stall global growth? Can Washington agree a way to cut America's monstrous fiscal deficit? The latest signs are mildly promising.
German lawmakers in the lower house of parliament approved an expansion of the 440 billion euro European Financial Stability Facility, helping along the process of ensuring Greece doesn’t stumble into a disorderly default on its debt.
Revised figures show the U.S. economy grew at a 1.3% pace in the second quarter, faster than the initial estimate of 1%, while claims for unemployment benefits fell more than expected and capital goods are holding up. But the euro saga is far from over and America’s economic growth is tepid at best. With that backdrop, an OCR at 2.5% is relatively attractive. There are plenty of places ‘more worser’ than New Zealand and its currency.