Lessons Of The Recent New Zealand Dollar Rally
There are two (or actually three) lessons of this: First of all, there's little or nothing in the fundamentals of New Zealand's economy that motivate these kinds of wild fluctuations, but because it disrupts business planning it has a disruptive effect on the New Zealand economy (and to a much lesser extent (as New Zealand means less to the rest of the world, than the rest of the world means to New Zealand), the rest of the world economy). The Friedmanite myth that fluctuating fiat exchange rates would somehow stabilize economies based on different fundamentals is thus once again proven to be a myth.
This again illustrates the point that I've pointed out here and here that the [uncovered] “interest parity condition" doesn't hold and that countries with high yields will give investors higher return. Even factoring in last year's big drop in the exchange rates of high interest rate countries, high interest rate countries offered much higher return over a longer period of time than low interest rate countries. The big rally this year for the high interest rate currencies of the Australian and New Zealand dollars makes the statistical superiority of high interest rate countries even greater.
The third point is that the future of the New Zealand dollar's exchange rate depends on how global stock markets will perform. It (and more importantly assets denominated in it) is so to speak a "high beta asset". If global stock markets rally further, then so will the New Zealand dollar. If global stock markets sell off, then so will the New Zealand dollar. Since I personally think that the risk is high of a stock market sell off; the risk is also high that the New Zealand dollar will sell off.