Our currency is off almost 10 per cent in six months — how low will it go? Photo / 123RF
Our currency is off almost 10 per cent in six months — how low will it go? Photo / 123RF
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
The bold and forward-looking moves made by our Reserve Bank have given us an edge in this race.
Technically, a lower dollar isn't the reason for cutting rates. But currency plays an important part in the Reserve Bank's thinking.
In its last monetary policy statement, the RBNZ noted that rates were falling around the world and this would usually put upward pressure on the dollar.
"However, expectations for lower New Zealand interest rates have dampened this effect."
So it begs the question, why is this a race we'd want to win?
The short answer is, to stay competitive in the face of a very serious trade war which threatens to curb global growth.
A lower-valued dollar gives our exporters an edge by effectively discounting the cost of goods in NZ currency terms.
Lower dollar gives exporters a boost. Logs stockpiled at Northport awaiting shipment. Photo / File
It's also a great shot in the arm for the tourism sector.
For Americans at least, there's now a 9 per cent discount on a holiday to New Zealand.
Our tourist growth has been slowing lately as dark economic clouds and recession talk weighs on the minds of travellers from China, the US and Europe.
One other area where a low kiwi offers something of a bonus is in investment funds and KiwiSaver accounts.
Dividends coming back from foreign investments will look better when converted to a lower-value kiwi.
It's possible we could see a lower dollar inflating our KiwiSaver accounts.
Meanwhile, local companies on the NZX will look relatively cheaper to foreign investors.
Of course, if the New Zealand dollar continues to fall it is also going to start to hit consumers in the pockets.
We pay more for imports - from petrol to big-screen TVs.
The impact is inflationary, which isn't such a bad thing for the RBNZ right now.
Inflation is at the low end of the RBNZ's target range so it can cope with a bit more.
And a disincentive to spend more on imported goods and overseas holidays probably also keeps more cash flowing in the local economy.
Where this trend is likely to bite is with domestically focused small and medium businesses - already feeling very gloomy according to every confidence survey going.
If rising fuel and import costs further squeeze margins then there is a risk that some businesses stop hiring and unemployment starts to rise.
Those businesses should see those costs offset by lower interest rates cutting their cost of borrowing - although this depends on how much is passed through by the banks.
The thing about currency is that it's all relative.
Someone's gain is someone else's pain.
Values only go up or down relative to another currency.
They can't all be devalued in unison.
So far this year most currencies have been falling against the US dollar as trade war uncertainty and America's relatively higher interest rates have turned it into a safe haven.
That's driving US President Donald Trump crazy as it doesn't help him in his trade war.
He's been berating the US Federal Reserve to cut rates faster - at one point suggesting chairman Jerome Powell was a bigger enemy than Chinese President Xi Jinping.
Federal Reserve Chairman Jerome Powell hasn't been cutting rates fast enough for President Donald Trump. Photo / AP
In New Zealand, our attitudes to the value of the dollar are also relative - highly dependent on what we're used to and the direction we're heading.
Take a look at this headline I wrote for the Herald in 2003.
"The rural sector is steeling itself for further surges in the kiwi dollar, which yesterday hit US58c for the first time in more than five years."
Many farmers were extremely nervous about their viability if the kiwi went above US60c.
But it didn't stop there. The kiwi rose and rose to a peak above US87c in 2014.
Thankfully, commodity prices rose too, off-setting the pain.
That's the way New Zealand's open economy and free-floating dollar is supposed to work.
It's a hedge which buffers our economy by rising and falling on our export fortunes.
If our key commodities can hold firm for a while yet then we should be able to cash in on relatively low exchange rate to keep some good momentum through this ominous economic cycle.
Ultimately, a stronger dollar typically reflects a stronger economy, so it would be a worry if the kiwi continued to slide.
But on balance, right now, it's just what the doctor (or governor) ordered.
