By Brian Fallow
Between the lines
Several factors are weighing the kiwi dollar down. Most of them are temporary but one, the chronic balance of payments deficit, is here to stay.
Bank of New Zealand economists see a trying couple of months ahead for the kiwi, because of election uncertainty, international investors' preference for big, deep markets as Y2K approaches, and the likelihood that it will be next February or March before the trade figures start to turn around.
Beyond that they expect the currency to follow commodity prices higher, reaching 60USc by the end of next year.
HSBC sets more store on interest rate differentials.
Short-term interest rates are lower than in the US, but the gap is expected to narrow as the Reserve Bank moves into tightening mode.
HSBC expects the differential to squeeze back to zero and become positive by the end of next year, and accordingly forecasts a long, slow grind upward for the kiwi, strengthening to 53USc in three months and 56c in 12 months.
In the medium term, the appreciation is expected to be moderated by the ongoing current account deficit.
The sobering feature of the Treasury's forecasts last week is not the short-term blowout in the balance of payments, but that when it returns to normal it will still be so bad.
The near-term deterioration can be put down to lumpy one-off imports like a frigate and to a sharp but hopefully temporary deterioration in the terms of trade.
But after the current March year, import growth is expected to outpace export growth for the next two years, just as it did for the past two.
That implies that even after the long-awaited export recovery, and allowing for strong tourism, the balance of trade in goods and services only gets back into the black to the tune of around 1 per cent of GDP.
Given an ongoing net deficit of around 7 per cent of GDP on the investment income account, that keeps the current account as a whole around the minus 6 per cent mark. At that rate, the stock of non-residents' claims on the New Zealand economy will continue to grow faster than nominal GDP, a situation that is not sustainable forever.
The classical market response to a current account problem is a weaker exchange rate and higher interest rates, respectively stimulating exports and dampening demand for imports.
This has led some economists, such as Deutsche Bank's Ulf Schoefisch, to expect the coming currency cycle to be more muted than the last one.
While the export sector would welcome the prospect of the dollar not returning to the levels it hit in the mid-90s, the flipside is that interest rates would have to do more of the work of combating inflation.
Treasury figures sobering reading
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