In just under 12 months the Kiwi dollar has appreciated from 0.4000 to 0.5500 against the United States dollar. That’s a 37.5% appreciation, most of which has happened in the last 4 months. In October 2002 the NZD was at 0.4700.
There are a number of contributing reasons for the significant gains in the value of the currency. Firstly, New Zealand has a buoyant domestic economy at present. Our growth rates have been comparatively favourable with most of the OECD countries. Secondly, the seasonal cycle of export receipts has been significant through this time.
Another contributing factor has been the large capital inflows relating to tourism and, in particular, the Americas Cup regatta. Tourists see New Zealand as
a safe haven status because of our location, the stability of our government, a financial system that is relatively free of regulation and a Credit Rating that puts New Zealand in or near the top tier of all countries. Having close links with Australia also provides us with stability in the region.
New Zealand’s interest rates are extremely attractive at present. Our Official Cash Rate of 5.75% is one of the highest in the Western world just now. At a time when global equity markets have been falling, it’s no wonder investors are chasing our rates of return using their off-shore funds. The buying pressure on the NZD is mostly coming from “off-shore” sources: managers of equity and hedge funds, Investment Banks and such like who need to find a home for cash balances.
The currency movement has not been entirely limited to New Zealand Kiwi strength. The USD has depreciated. Clearly geo-political influences have created a significant level of instability in the global trade and financial markets, 9/11 providing one of the early catalysts for the situation that is current today. From the “Twin Towers” catastrophe, falling equity markets exposed a number of frailties in Corporate America which have contributed to a major downturn in economic performance on a global basis. Obviously the global nervousness about ongoing terrorism, Afghanistan and Iraq have stymied any recovery possibilities and ensured equity markets remain under extreme pressure. This leads in our view to the most significant reason why “the Kiwi has grown wings”.
We have graphically overlayed the NZD onto the Dow Jones Index. In the previous up-cycle the NZD was at 0.6400 when the Dow Index was around 7500.
The equity boom of 1999/2000 saw the Dow rise to above 11000 with the NZD falling below 0.4000. During the latter half of 2002 the Dow dipped to the 8000 area with the NZD climbing to 0.5500 in the early part of 2003. In general terms the Dow Jones Index and the NZD mirror one-another almost perfectly in the reverse sense.
Assuming that at some stage global equity markets being to recover, offshore funds that previously flowed into New Zealand will begin to flow out to return to global equities. That, in turn, should see the NZD begin its depreciation cycle.
For the New Zealand Investor looking at the global markets there are possibly very favourable advantages ahead. Under the above hypothesis, investing offshore as the equity cycle begins its up-tick should also catch the NZD at near the beginning of its down cycle.
This article was contributed by ELLDRIDGE LYNCH, a New Zealand based company that provides foreign currency services to a wide range of clients. The company is able to transact clients’ currency requirements nationally and internationally around the clock from 7.30 am on Monday till midnight on Friday.
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