Spare a thought for Latvia as kiwi flys

There are a lot of good ways for a nation to define its self-worth - sporting victories, artistic achievement or even business success.

It would be madness to let currency traders get a grip on the national psyche (unless you made one Prime Minister perhaps). But when it comes down to a country's worth in the world, currency markets hold plenty of power.

We see it at the most fundamental level when we head overseas. All those complicated computer models and gut instincts in the dealing room ultimately decide how much we pay for a bottle of local beer compared with other tourists at the bar.

So, if you were a Kiwi drinking with Latvians in an American pub this week (and who hasn't been there) you'd have been the life of the party.

Latvia, for those not in the Baltic news loop, hasn't had a good week currency wise.

The small former Soviet state is in a position technical analysts describe as stuffed. Its economy contracted at an annualised rate of 18 per cent in the first quarter.

On Wednesday it found itself unable to sell short-term debt as its currency hit the bottom of the fixed range by which it is pegged to the euro. As traders continued to sell the currency (the Lat) analysts said it would need to unpeg and devalue by as much as 30 per cent.

For the record, Latvia had one of the fastest rates of GDP growth in Europe from 2000 to 2007.

It provides another reminder, if one was needed after Iceland and Ireland, that the rate of GDP growth is far less important than its quality.

Back in New Zealand - as grim as it has been for exporters - the rise and rise of the kiwi dollar in the past few weeks ought to provide us with some sense of comfort.

The world of international finance doesn't think New Zealand is a basket case teetering on the edge of economic apocalypse. At least not right now.

We should never forget that currency traders can turn on a country faster than the British public on a frumpy Scottish singer.

The speed and liquidity of the currency market is all the more obvious in volatile times like these.

The kiwi surged to almost US66c on Wednesday then plunged by US3c that night.

Between February 2008 and February 2009 it shed 40 per cent of its value. Since that February 2009 trough - at US49.6c - it has risen by 32 per cent. The strong rebound seems counterintuitive when we're constantly being reminded how debt-ridden and depressed our economy is.

The problem is that currency traders have to buy something and there aren't that many options. They'd buy Martian dollars if they could, but they are stuck here on earth and with a downturn that has touched almost every nation.

While the kiwi is just one of many currencies to have risen on the back of anti-greenback sentiment, it is also on the up because it is considered a commodity currency and commodities generally are rallying.

As BNZ economist Tony Alexander points out in his weekly market wrap, those Japanese housewives haven't gone away either.

The Japanese mum and dad investors got plenty of press a few years ago for buying New Zealand dollar-denominated investments called uridashi and driving up the kiwi.

They were supposed to retreat as our economy headed in to recession and the risk on their investment increased. But they are still buying, lured in by our official cash rate of 2.5 per cent - which still looks enticing now that Japan's rate has dropped to zero.

So the kiwi is on a roll and it is disappointing because it does dampen hopes for an early export-led recovery. But we were never going to get out of this downturn that easily. The dollar will be back down again.

When it falls it could well be because commodity traders overdo the rally and create another mini-crash. Which won't be a good thing either.

The system isn't destined to allow New Zealand's exporters to enjoy a best case scenario of high commodity prices and a low dollar. Their best hope is a stable middle path - steady demand for commodities and a dollar somewhere around US55c.

Whether you believe the world is starting to recover or not, that kind of stability looks a long way off.