Is our dollar at the cross-roads?

DollarcrossroadsSmall(copy)Mid-2014 saw the New Zealand dollar (NZ$) hovering around post-float highs. In recent years, the dollar has appeared to defy gravity and go from strength to strength. This has been great for those consumers who purchase imported goods or who wish to travel overseas - their purchases have become cheaper than what they were five or more years ago. However, our high dollar has made it difficult for exporters and this has slowed our economy to a certain extent.

Predicting currency trends is fraught with danger as there are so many variables driving the short- and long-term rates. One thing we can be certain of is that someone can always prove our predictions wrong.   However, the NZ$ is appearing to be approaching a crossroad. A minority of economic commentators still claim our dollar will reach parity with the US and Australian dollars. An increasing number of commentators though are starting to indicate that the tide may be turning and by late 2015, we could see our dollar somewhat weaker against the US, Australian and Euro compared to where it is now in mid-2014.

What has changed to cause economists to predict a weakening of the NZ$? As with everything to do with economics and money, it is no one single factor. Our economy has been labelled by some as the ‘rock star’ economy. This indicates we have been somewhat out of step with many of the OECD countries. New Zealand has been doing well while many OECD nations have been limping along at best. This has made NZ appear safer than our small economy would normally be regarded and money has flowed into NZ$ to take advantage of our high dollar compared to low rates elsewhere.  Many OECD countries are starting to show signs of recovery. As they improve and as they slowly raise interest rates, money will start to flow into those currencies as they potentially provide a better risk-adjusted return than little NZ. Australia is struggling economically but it is still the ‘lucky country’ and it will recover from its current tough patch. As it recovers, the potential for its dollar to increase in value against the NZ$ increases. Some of the NZ commodity prices are declining in value and this, combined with the potential risk that a major trading partner like China may cut import volumes, creates a heightened risk profile for our currency.

How far our dollar may decline is anyone’s guess. ANZ predicts the NZ dollar to be around 76 cents against the US$ by end of 2015 (ANZ quarterly economic forecasts June 2014). This is a bold call but it is certainly conceivable considering the steady improvement seen in the US economy.

A strengthening US$ and a declining NZ$ in relative terms is not necessarily a bad thing. It will make imports more expensive but this could slow consumption – hence slowing inflation. It would give a much needed boost to our long-suffering exporters and this in turn could benefit a wider sector of our economy. For investors in portfolios with a high offshore component, it can mean significant increases in portfolio value as offshore investments are calculated into NZ$. Investing into offshore investments such as international share funds  whilst the NZ$ is high is potentially a good move for some as there will be currency gains over the next 12-24 months assuming a weakening in the NZ$.

Talk to us about how to take advantage of this.