Tuesday, February 03, 2009

The Super Weak New Zealand Dollar

The New Zealand dollar yesterday fell below 50 U.S. cents (Which in inverted terms means it costs more than 2 New Zealand dollars to buy 1 U.S. dollar). While that is not a record low against the U.S. dollar as it was briefly trading below 40 U.S. cents back in September 2001, it's nevertheless the lowest since December 2002. And moreover, the low value back in 2001-2002 reflected to a large extent the extreme strength of the U.S. dollar at the time, and if we look at the exchange rate versus the euro and the yen, it is in fact record low. Back in 2001, the New Zealand dollar traded at 48 Euro cents and 49 yen. Now it is trading at 39 euro cents and 45 yen.

After the 2001 lows, the New Zealand dollar had several years of bull market, as it rose in 2007 to highs above 80 U.S. cents, above 60 Euro cents and nearly 100 yen. The collapse against the yen since then is particularly dramatic, losing more than half of its value in the latest 19 months. Although it took some beating in the year after that, most of the decline has come since the global financial turmoil became more dramatic in September 2008, with the New Zealand dollar dropping 45% in just 5 months against the yen.

The reason why the New Zealand dollar has taken such a beating against other currencies in general and the yen in particular is of course that New Zealand went into the slump with higher interest rates than others, meaning that its interest rates had more room to fall, putting downward pressure on the currency. The New Zealand dollar has in other words depreciated in value because of the same mechanism that has caused the yen to rally .

Where will it go from here then? At this point, it clearly looks undervalued, but as long as the global slump continues it will nevertheless be difficult for it to recover as people will expect the Reserve bank of New Zealand to cut interest rates further to counteract the slump.

Because New Zealand more or less appears to have structurally higher interest rates, that however means that once there is an economic recovery, it will probably again rally significantly, just like it did between 2001 and 2007.


Blogger Ke said...

Stefan, I wanted to ask you about the current unemployment crisis in China.


It seems that further devaluation of the RMB is the most logical action to take. For the people with ideas that the RMB is way undervalued versus the U.S. dollar now seems absurd. Do you agree?

Sorry for going off the topic.

7:24 PM  
Blogger stefankarlsson said...

Ke, one can never be certain with politicians, but I find it less likely that China will devalue. They know very well what kind of outcry and possible retaliatory actions in the West this would create.

I think it is more likely that they will continue to focus on boosting domestic demand.

10:31 PM  
Anonymous Anonymous said...

Also the NZD was a verry popular currency with Japanese houswifes who invested their yen in NZD because of the interest rate diff.


8:28 AM  

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