Why a strong cur­rency is good for busi­ness

A strong cur­rency is the bane of ex­porters' lives. But a weak cur­rency could be even worse.

Idealog - - OPINION -

BE CARE­FUL WHAT you wish for. Ex­porters in New Zealand who have been cry­ing over the dev­as­tat­ing im­pact of the strong cur­rency should take some time to re­flect on whether a weaker dol­lar will re­ally ease the pains of build­ing a solid and sus­tain­able busi­ness.

The reign­ing sen­ti­ment says the New Zealand dol­lar is over­val­ued. Those who have voiced this sen­ti­ment in­clude the In­ter­na­tional Mon­e­tary Fund, which thinks the Kiwi is in­flated by about 15%, Re­serve Bank gov­er­nor Graeme Wheeler, and lately Prime Min­is­ter John Key.

The truth is ev­ery­body around the world has had a love af­fair with the Kiwi for quite a while now. The New Zealand dol­lar was the tenth most ac­tively traded cur­rency in the world in 2013, with over $27 bil­lion dealt daily.

Smart money flows to where the best deals are to be found. That’s why uri­dashi bonds ( Ja­panese for­eign cur­rency- de­nom­i­nated se­cu­ri­ties sold di­rectly to mum and dad in­vestors) have been a spell­binder for the Ja­panese. Mrs Tanaka or Mrs Nori can eas­ily bor­row money in Ja­pan, at zero in­ter­est, to in­vest in Kiwi-uri­dashi bonds pay­ing de­cent in­ter­est rates.

As an in­di­ca­tion of how fren­zied the de­mand for uri­dashi bonds is, in 2006 Aussie- and Ki­wide­nom­i­nated uri­dashis ac­counted for 80% of the bonds in is­sue. While this share dropped to 30% in 2013 it has started climb­ing back to 40%.

De­spite the Kiwi head­ing for some cor­rec­tion, dip­ping be­low the 80c to the US dol­lar level at the time of writ­ing, truth be told, it is bet­ter for ex­porters to brace for an en­vi­ron­ment of strong cur­rency rather than wish for a weak cur­rency.

His­tory has some great ex­am­ples of why New Zealand should fo­cus on build­ing an econ­omy pow­ered by strong, well-gov­erned and savvy com­pa­nies that can bat­tle the worst con­di­tions, rather than be­ing those which shel­ter under the roof of a weak cur­rency.

In­ci­den­tally, a lot of bas­ket case economies have weak cur­ren­cies, but that’s all they can boast of.

Fun­da­men­tally, a busi­ness that suc­ceeds based purely on price at­trac­tive­ness hasn’t got enough sinews to be sus­tain­able over the long term. A bet­ter busi­ness is one built around the phi­los­o­phy of be­ing the pre­ferred sup­plier based on a whole host of rea­sons, rather than based around price.

Sure, it is al­ways go­ing to be crazy dif­fi­cult – but cru­cial – to man­age wild cur­rency fluc­tu­a­tions. A com­pany can have its mar­gins wiped out when the ex­change rate moves 10%20% within a few months.

But a weak New Zealand cur­rency will do more harm than good in the long term. Sure it will help sell a few more wid­gets. But it will also breed com­pla­cency, dampen con­sumer sen­ti­ment, ham­per our abil­ity to re­pay huge debts, and ig­nite im­ported in­fla­tion.

The last few years of a strong dol­lar has given ex­porters rea­son to think a lot harder, to scrounge for ef­fi­cien­cies, and find in­no­va­tive ways to de­liver a bet­ter prod­uct.

Some com­pa­nies, es­pe­cially those in soft­ware and the high-tech man­u­fac­tur­ing sec­tor, have done in­cred­i­bly well. Their great­est achieve­ment is find­ing growth de­spite what can be term as a ridicu­lously high cur­rency en­vi­ron­ment.

These com­pa­nies should serve as a re­minder that suc­cess comes to those who learn how to adapt to volatil­ity.

The Lud­wig von Mises In­sti­tute, a US-based eco­nomic think-tank, has ex­am­ples from other economies. In the UK, the in­sti­tute notes, ster­ling has dropped 25%-30% since 2008, yet the de­pre­ci­a­tion has done lit­tle for the pal­lid UK econ­omy.

Mean­while the Ja­panese yen, which has ap­pre­ci­ated over the last four decades against the green­back, has grown ex­ports. And a weak­en­ing green­back has done lit­tle for Amer­ica’s trad­able sec­tor.

Smart money is also of­ten heart­less money. There is no loy­alty, and no sen­ti­ment in­volved when fund man­agers chase the high­est yield­ing as­sets. The US and Europe have been in quan­ti­ta­tive eas­ing mode for a while now.

When in­ter­est rates start creep­ing up in the north­ern hemi­sphere, be pre­pared for some dump­ing of New Zealand dol­lars and a spi­ralling down­wards of the Kiwi.

But hold off on the cel­e­bra­tory fire­works.

Yoke Har Lee-Woolf is

dig­i­tal edi­tor.

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