Selling our primary produce on the international market has always been the lifesaver for New Zealand - even during really tough times like world wars. Butter mountains, while never the proportions of Everest, were conquered with Hillary-like determination. The Kiwi Dollar was such that our economy recovered when other economies were laid to waste.
However, attempts to successfully scale the heights of the economic crisis this time appear to be more laboured than in the past. Some are saying that the export led recovery is foundering on the high New Zealand dollar. The calls for Bollard to reduce the Official Cash Rate (the OCR) before the September review are now as loud as the cheers that rang out on May 29th 1953 when Hillary announced to George Lowe that they had “knocked the bastard off” (Hillary later admitted that Everest had not been defeated, rather that it had "relented"). The high New Zealand dollar does not appear ready to relent from its position any time soon!
Exporters are probably making comments about the exchange rate that would make Hillary’s words sound like a convent school prayer. A high dollar makes exports worth less on the international market, making the efforts by those exporting (manufacturers and farmers) less profitable. The risk is that this will stifle the export led recovery and may even send some ventures to the wall when in a different exchange rate environment may be very profitable.
Among the reasons the Kiwi dollar is high is the fact that our base interest rate, the OCR, is among the highest of the western economies at 2.5% - meaning that international investors see 2.5% as attractive! With base rates in the UK and the US at or close to zero, the 2.5% we are offering must be like gold!
Interestingly, the Kiwi seems to have a close correlation to the Dow Jones Index – meaning that what the Dow does, the Kiwi does. This shows that both measures reflect a willingness of investors to assume some risk for their investments. So, while New Zealand is seen as a somewhat risky place to invest, this risk is rewarded with a good return (comparatively speaking) by way of its base interest rate, the OCR. The result of this is that the Kiwi is demanded, and and as with commodity, high demand means a high price.
Bollard said only last month that “The OCR could still move modestly lower over the coming quarters”. This prompted many to respond with "Put your bollards on the line and do it now?" To date, Allan has not responded to these calls and I do not expect him to do so, at least not before September 10th at 9.00AM - he has never given the impression that he will succumb to pressure groups.
However, while a lower OCR may drive down the value of the Kiwi dollar and improve the value of our exports, it will not help those wanting to live off the savings they have deposited with banks and other Government Guaranteed institutions. A lower OCR and the resultant interest rate environment will only make their lives more difficult.
A weaker dollar will also drive up the cost of imports like petrol, off-shore bank borrowings, electronics, clothing (since most of our wardrobe is manufactured offshore now) and cars – some of the measures of our inflation rate. If lower interest rates are accompanied by heightened inflation, then the investors’ predicament is merely made worse. The real value of investors’ hard earned savings will be eroded with time.
As an investor, the mattress may be looking very attractive!
However, if the mattress is the only response by an investor, then there may be opportunities to protect and grow wealth that are missed. For instance, just as the Kiwi Dollar has rallied over 30% since March, (it is currently trading at about US $0.67c up from US$0.50), the Dow Jones has also rallied a similar amount, from about 7,000 points in March to about 9,200 points as at close of business last week – August 7th.
In saying this, I am not suggesting that a green light has been turned on signalling a flood back into equities is appropriate. What I am saying is that while staying out of equities in recent months may have felt safe, it may have also reduced an investor’s wealth and done exactly what an investor wanted to avoid.
Some of you may say that the needle has stuck on my record – those of you who remember needles and records. Those a bit younger may say there is dust on my CD. However, my message is still that advice remains one of the cornerstones for investing. Perhaps advice is like the Hillary Step in the first ascent of Everest – it will not get you to your goal, but it may help you realise how to get there.
Peter Curnow is a member of the IFA and an Adviser with Searells Financial Services Limited, a part of
Searell and Co Limited – Chartered Accountants and Business Advisers.
A copy of his Adviser Disclosure is available free of charge upon request
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