Mark Lister

Kiwi dollar rides high but keep an eye on CPI

One of the biggest financial market stories in New Zealand of the summer break has been the resurgence of the NZ dollar. On a trade-weighted basis, the currency has rebounded to a three-month high, about 4.5 per cent above where it fell to in November.

The exchange rate that gets the most attention here is the one that measures our currency against the US dollar. This is unsurprising, as the greenback remains the primary reserve currency of the world.

The US is also our third largest export market (behind China and Australia), taking 11 per cent of our goods and services. Almost all commodities are priced in US dollars, including the main ones we sell such as milk and other dairy products.

Our currency has been very strong against the US dollar recently, rising some 6 per cent compared with the November average. In recent days, it’s traded above US73c for the first time since before the election. It might seem a little strange the US dollar has been so unloved of late, especially considering how strong the economy is looking and with US interest rates undoubtedly on the way up.

However, currency traders seem more focused on the other side of the Atlantic at present, where the euro’s strength has caught many off guard.

The euro is at a three-year high against the US dollar, as the region has shrugged off the political drama of recent years and the economy has gained some serious momentum.

Germany’s IFO Business Climate survey, which began in 1991, hit an all-time high in November, while manufacturing indicators are the strongest in two decades.

This has made people reconsider how long the European Central Bank (ECB) will be able to persevere with its ultra-loose monetary policy.

As a result, the NZ dollar is more than 5 per cent below the average of the past 12 months against the euro, but up against the US dollar.

Some of these moves will be due to local factors as well. Economic news has been solid over the past few months, with GDP growth figures released in December looking better than many expected.

It’s also quite normal for the kiwi dollar to perform well when financial markets are in an optimistic mood generally.

The global investment community might also be starting to relax about our change of Government. The NZ dollar sank 7.5 per cent against the US dollar in the eight weeks following the election, but now we’re right back where we started in the week before polling day.

For the average person, the stronger exchange rate will be softening the blow from higher fuel prices, with crude oil up nearly 40 per cent since the middle of last year.

Dairy farmers won’t be quite so happy. They would’ve been happier back in November at about US68c, rather than up at today’s levels.

Other exporters and importers will have mixed feelings about the moves, depending on which part of the world they’re selling to and buying from.

Let’s see how that all feeds through to the latest CPI figures tomorrow, given that almost half of the price basket is made up of imported goods.