Exchange rate fall to boost manufacturing

By Brian Fallow

WELLINGTON - A steady fall in the transtasman exchange rate over the past two months should make life a little easier for hard-pressed manufacturers.

The kiwi dollar was trading below 79Ac yesterday, 5c or 6 per cent lower than its level two months ago.

Manufacturers Federation economist Peter Crawford said that benefited both manufacturing exporters and firms competing with Australian imports, which have been gaining ground in such areas as processed food and paper products.

Australia takes about half of New Zealand's elaborately transformed manufactured exports.

Anecdotally, some smaller manufacturers, burned when the exchange rate was high, were looking again at exporting, he said.

Bank of New Zealand economist Peter Jolly said that after a year or so of relative stability in the cross rate, currency markets had of late been taking more account of the differences in the two countries' economic performance.

"When you look at the scorecard, we just don't cut it," he said.

Australia had stronger growth, a smaller current account deficit relative to the size of the economy, and arguably a more credible central bank. It had recently received a credit rating upgrade, while New Zealand is on notice of a possible downgrade.

In addition, the Australian Government had removed withholding tax from corporate bonds, increasing demand from overseas investors.

Deutsche Bank chief economist Ulf Schoefisch said unemployment numbers released yesterday reinforced the picture that the Australian economy was in better shape than New Zealand's.

The 62,000 new jobs in June was twice what economists expected, while the unemployment rate fell to 7.2 per cent from 7.5 per cent in May.

By contrast, New Zealand job advertisements increased only 0.8 per cent in June, continuing the trend of slowing growth evident all year.

Mr Schoefisch said the outlook for both currencies ultimately depended on commodity prices and they would appreciate as world economic growth gathered pace.

"We see the kiwi dollar [trading below 53USc yesterday] at 57c by the end of the year," he said. But the Australian dollar might advance faster, implying a period when the transasman exchange rate declined further.

"As we have seen in the past, the New Zealand dollar is a small currency which can make big leaps in response to changing international fundamentals," Mr Schoefisch said.

"At the moment, everyone is revising up their world growth forecasts because of stronger signs coming out of Asia. Increasingly, international commodity prices are getting out of line, so that at some time there might be some catch-up there."