Lessons Of The Recent New Zealand Dollar Rally
One currency that unlike the British pound and the Ukrainian hryvnia has continued a fairly predictive pattern is the New Zealand dollar. Between March 2008 and March 2009, it dropped nearly 40% against the USD, from 81 US Cents to 49 US Cents, with most of the drop coming after August when stock markets started to plunge. But since then it has staged a spectacular rally, reaching a new 2009 high of 72 US Cents (Up nearly 50% from the March low!). Part of that reflects the general weakness of the U.S. dollar, but it also reflects a particular strength of the NZD, as it has risen against the euro by nearly 20%.
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.
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.
posted by stefankarlsson at 1:42 PM
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