Mark Lister: Why dollar is falling as sharemarket rises

The fall in the NZ dollar's value reflects the fickle tendencies of currency traders. Photo / 123RF

Opinion

• Mark Lister is head of private wealth research at Craigs Investment Partners. This column is general in nature and should not be regarded as specific investment advice. The author holds shares in a number of the companies mentioned.

Since the election we've seen the currency fall about 5 per cent, while the local sharemarket has kept rising.

That's a little unusual, because both tend to move in the same direction, depending on how prosperous our future is looking.

So what gives, and which do we believe? Is our falling dollar a sign we're headed for trouble, or is the sharemarket right to be unconcerned?

Since we voted, the currency has fallen sharply. On a trade-weighted basis (which measures our currency against a basket of trading partners), the NZ dollar is back to levels not seen since May last year.

Meanwhile, the NZX 50 sharemarket index has been on a steady uptrend, seemingly ignoring the uncertainty of the negotiation period and the final outcome.

There are a few reasons for these diverging fortunes. For a start, currency traders (many of which are based offshore, rather than here) tend to be very fickle. They are better described as speculators, rather than investors, and their view can be extremely short term.

Comments around foreign ownership restrictions or potential fine-tuning of the Reserve Bank Act have seen them lose interest in us, and move on to the next opportunity elsewhere in the world.

The sharemarket, on the other hand, has a much greater proportion of longer-term investors. That includes KiwiSaver funds, private investors and other groups who still have confidence in our listed companies' ability to perform well, regardless of who is in charge of the Beehive.

We should also remember currency movements aren't all about us. We are only one side of that equation, so often the moves we see have just as much to do with what is happening in the United States, Britain or Europe as in New Zealand.

Economic data has been stronger than expected in all of those places during recent weeks, and we might see a couple of global central banks raise interest rates soon in response.

These factors have given support to the likes of the British pound and the US dollar, which has compounded the weakness we've seen in the local currency.

Many companies on our market have a large international aspect to their businesses these days. Think Fisher & Paykel Healthcare, Mainfreight and Xero, where the bulk of revenues come from offshore.

There are plenty more with significant export earnings. Scales, Tourism Holdings, Vista - the list goes on. All these companies will be quite happy with what they've seen on the currency front lately, because this NZ dollar weakness equates to increased profitability.

Finally, there is a general expectation that economic growth might slow a little amidst policy changes, which means less upward pressure on local interest rates. With the average gross dividend yield for the NZX 50 comfortably above 5 per cent, much of our market will continue to find support.