Soaring dollar wipes out export gains

By BRIAN FALLOW, Economics Editor


Last month marked a return to a "now you see it, now you don't" experience for commodity exporters as higher world prices were wiped out by a rampant New Zealand dollar.

The ANZ Bank's commodity price index has been on a rising trend since the middle of last year.

Led by venison, beef and lamb, it climbed a further 2.1 per cent last month to be 10.6 per cent higher than a year ago.

But that is in world price terms. When translated into New Zealand dollars, the basket of export commodities was worth 2.2 per cent less than in October.

That follows three months in which the world price gains were sufficient to outpace the dollar's rise.

ANZ said world prices for beef rose 8.2 per cent last month, the fifth solid monthly increase in a row.

A steady upward trend in lamb prices continued with a 3.9 per cent gain last month. The lamb index is the highest in its 18-year history.

ANZ chief economist David Drage warned against assuming the pick-up in world economic growth would further boost commodity prices.

Although a stronger world economy in general terms was a rising tide with the potential to lift all boats, he said, much of the increase since the middle of last year had reflected supply-side factors.

"In particular, drought saw Australian rural export volumes drop 13 per cent in 2002-03 creating shortages which have put upward pressure on world agricultural prices."

In addition, many of the basic foodstuffs which dominated New Zealand's export basket were relatively insensitive to changes in consumer incomes, so there was no guarantee a further improvement in the world economy would translate into stronger prices for key commodity exports.

"Indeed while many markets for many commodities are tight at present, that could change as the influence of the Australian drought fades and production recovers."

Statistics New Zealand reported on Friday that imports exceeded exports by $3.2 billion in the year ended October, a widening of the trade gap from $2.8 billion in the year ended September.

The kiwi rose 12.4 per cent in trade-weighted terms in the year to the end of October. But the impact of a higher exchange rate on export receipts has been much greater than on the import bill.

Imports have been buoyed by a strong domestic economy, attested to in recent data on the housing market, labour market and retail sales.

Drage said the strength of the domestic economy and the associated inflation risks meant the next move in interest rates would be up.

But recent further gains in the New Zealand dollar increased the disinflationary effects on the other side of the scales, making imports cheaper in the short term and slowing the wider economy down in the medium term, as reduced export incomes fed through to more moderate domestic consumption.

The trade-weighted index at 65.5 was now 4 per cent higher than the average level the Reserve Bank had assumed for the second half of this year, he said.

Drage expected that to have created enough uncertainty about the inflation outlook to see Reserve Bank Governor Alan Bollard keep the official cash rate on hold tomorrow.

In a Reuters poll of economists' expectations on Friday, eight out of 14 forecasters expected the Reserve Bank to sit tight, while the others expected it to raise interest rates a quarter of a percentage point.

As the dollar has risen, financial markets have shortened the odds on a tightening but on balance still expect a rate rise tomorrow.

Drage said the risk was the New Zealand dollar would rise further regardless of local developments.

"But if the Reserve Bank leaves rates on hold that may stem it for the time being because of disappointment on the part of those in the markets expecting interest rates to rise."