NZ exporters may get little respite from high kiwi in 2011

Exporters may not get much respite from high kiwi dollar in 2011

By Paul McBeth

Dec. 31 (BusinessDesk) – New Zealand exporters hoping for a significantly weaker currency may not get respite in 2011, with the kiwi dollar unlikely to shed much, if any, of this year’s 6.7% gain, analysts say.

Local manufacturers who sell their wares offshore have had to contend with a strong New Zealand dollar eroding their profitability this year, and prompted firms such as fishing company Sanford Ltd., whiteware maker Fisher & Paykel Appliances Holdings and its sister company F&P Healthcare Corp. to complain about the free-floating currency.

The kiwi is poised to end this year as the fourth-best performing currency behind the yen, Australian dollar and Swiss franc – a mixture of risky and safe-haven currencies. It recently traded at 77.11 U.S. cents and will hold around these levels going into 2011 as a return to global growth stokes demand for so-called commodity currencies, some analysts say. The kiwi started 2010 at 72.56 cents and recently traded at 68.30 on the trade-weighted index of major trading partners’ currencies from 66.64.

“Investors really are wary of buying the U.S. dollar, even in a situation where yields have risen,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. “Post-global financial crisis, the recovery has seen significant gains for a lot of commodity currencies” and next year will probably see them trade in a tighter range, he said.

Ongoing strife in Europe’s sovereign debt also is expected to bolster riskier, or higher-yielding, assets such as the kiwi dollar in January and February as a large chunk of the region’s government bonds come to maturity. Portugal, Ireland, Greece and Spain, colloquially known as the PIGS in relation to their heavy indebtedness, are all on notice from credit rating agencies over their ability to slash fiscal deficits.

As the recovery in the U.S. becomes more apparent, some analysts predict the kiwi will lose its sheen later in the year as persistently high prices for raw materials start to ease and the central bank finally gets around to tightening monetary policy.

Reserve Bank Governor Alan Bollard was forced to keep interest rates low after two hikes mid-year when New Zealand’s recovery stalled amid tepid consumer demand and a soft housing market. At the same time, he had to contend with a strong currency that hindered his favoured rebalancing of the economy away from debt-fuelled spending and into higher savings and investment.

Bollard’s December forecast is for the TWI to peak at 68.90 in the March quarter before falling to 67.10 in December.

Mike Jones, strategist at Bank of New Zealand, said the kiwi will probably pare gains later in 2011 with the world’s biggest economy lurching back to life, though a more upbeat local recovery next year will keep the currency around the mid-70s at the end of the year.

“The investment picture is quite positive in New Zealand and we’re picking 5% growth” in 2011, Jones said. “The momentum comes more from one-offs like the Rugby World Cup, the Canterbury earthquake rebuild, tax cuts continuing to work through the system and high commodity prices all in one year.”

Derek Rankin, director at Rankin Treasury Advisory Ltd., expects the reverse to happen, with kiwi weakness early on in the year as American stimulus bolsters the economy’s outlook which will wear away later in the year as European austerity cuts address the structural issues faster than in the U.S.

“The U.S. economy has serious problems while the European economy will start to come right from their austerity measures,” Rankin said. “Long-term, the Europeans’ budgets are going to get balanced, and that’s why I still favour the euro over the U.S. dollar.”

He predicts the kiwi will trade between 70 U.S. cents and 80 cents next year, pressing the top of the range in the latter half of 2011.

Exporters may face a double-whammy with the kiwi likely to recoup losses against its Australian counterpart as New Zealand interest rates narrow the gap with those across the ditch. New Zealand’s central bank isn’t expected to resume lifting rates until the latter half of next year, though the Reserve Bank of Australia has probably stopped its tightening regime for now.

Rankin said the kiwi dollar will continue to lag behind the Australian dollar “until interest rates cross back over.”
The spread between benchmark rates in the two countries is currently 175 basis points in Australia’s favour. Rankin expects the kiwi will head back up towards 80 Australian cents, though that may not happen next year.

Westpac’s Rennie said 2011 should be positive for the kiwi against its neighbour, and any dips towards 73.50 Australian cents would be “very attractive” for buyers.

(BusinessDesk)

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