By Brian Fallow
Between the lines
"For this relief, much thanks" is no doubt the sentiment of many exporters in light of the kiwi dollar's weakness this week.
But the currency's decline is also a reality check, and a warning.
It has been accompanied by falling bond prices, at the shorter end at least, implying that investors are pulling out not only of the New Zealand dollar, but out of New Zealand financial assets as well.
Some of that can be put down to a global trend. With the millennium approaching there is a fight to liquidity, a preference for cash, for government debt over corporate debt, and for big, deep bond markets over small ones like ours.
Why should we care? Well, in the absence of speculators - sorry, investors - doing "carry trades" (borrowing in low-interest-rate currencies and investing in high ones) exchange rates tend to reflect more fundamental factors.
And one of our fundamentals, the current account deficit, is conspicuously awful.
This week's trade figures provided scant sign of improvement on that front.
Imports in the three months to July were up 11 per cent on the same period last year, but exports were up only 2 per cent.
The Reserve Bank, despite its bullish view of export prospects, last week forecast the deficit would top 7 per cent by next March and stay above 5 per cent for two years beyond that.
The classical corrective market response to a current account deficit is to drive the currency down and interest rates up.
That stimulates the export sector while dampening the domestic economy and demand for imports.
In normal times that effect can be mitigated by "hot money" flowing in to take advantage of the higher interest rates.
But the Y2K-related flight to liquidity deprives us of that fig leaf.
Another factor which will count against the kiwi dollar for a while is political uncertainty, inevitable with an election looming.
The sell-off of the kiwi since Wednesday has had the salutary effect, however, of reversing a spike in the transtasman exchange rate last week.
Investors contrasting the Reserve Bank's hawkish monetary policy statement with the comparatively "no worries" tone of its Australian counterpart, drove the kiwi more than 2c higher against the aussie.
All of that has been retraced.
But the New Zealand dollar's drop also means that in one important respect the Reserve Bank's forecasts are starting to look out of date 10 days after they were released.
Monetary conditions are substantially easier than the bank had assumed for the second half of 1999.
It is as if 90-day interest rates, which the bank has indicated will need to rise before the end of year, were not 4.9 per cent but 3.2 per cent.
The longer the dollar stays at these levels, the more probable becomes a rise in floating mortgage rates in November.
Weaker kiwi dollar carries timely warning
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