High exchange rate not all bad

The New Zealand Manufacturers and Exporters Association is calling for action on the exchange rate, saying it has cost exporters $10.4 billion over the past three and a half years.

In February 2009 the NZ Dollar bottomed out at 52.3 on the Trade Weighted Index (TWI), but since then currency manipulation overseas and inaction in New Zealand have seen the NZ Dollar TWI rise to 72.9 in August. For every one percent the currency rises it costs New Zealand exporters approximately $200 million on an annual basis. Between February 2009 and August this year the NZ Dollar rose by 20.6 percent, and it has averaged 14.8 percent above the February level over the last three and a half years.

NZMEA Chief Executive John Walley says, “It is no wonder that we are seeing job losses in coal and aluminium with a statistic like this.  To put this in perspective New Zealand’s total annual merchandise exports are around $45 billion, so this is a hugely significant number compared to the margin on those sales.”

“Claims that nothing can be done to manage the exchange rate impact are only true in the context of our chosen macroeconomic framework – there are alternatives.  Witness the international evidence from countries such as Switzerland, the United Kingdom and the United States, that efforts to control exchange rates can and do work.” . . .

There is no doubt that a high exchange makes it difficult for exporters because it makes their goods and services more expensive.

But does the NZMEA’s calculations take into account the high exchange rate also makes imports cheaper and some of those – like fuel and machinery – have helped reduce costs of production.

That might not have offset the lower returns as a result of the higher dollar but does the $10.4 billion taken any account of it at all?

Various factors impact on the exchange rate. One of these is debt which is why the government is committed to returning to surplus as soon as possible.

But the main reason our exchange rate is so high is because the United States’ dollar is so low we are far to small to have an impact on that.

Labour thinks we could start playing with currency again. Someone should tell ’em they’re dreamin’.

15 Responses to High exchange rate not all bad

  1. Roger says:

    And for those with debt their interest rates are at historic lows. It’s not all bad this crisis stuff.

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  2. Bulaman says:

    Again.. If government stopped running deficits (through over paying too many public servants) and providing overseas money lenders with an attractive sovereign debt option (borrowing cheaper than printing?) our exchange rate would settle to the level supported by actual traded goods.

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  3. The calculation is based on 50 percent of the lost export revenue being compensated by cheaper imported materials, fuel, etc.
    Also, it is worth noting that countries have been able to reduce the value of their currency against the US Dollar – Switzerland for example.

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  4. homepaddock says:

    Thanks for clarifying the calculation. How did Switzerland reduce the value of their currency?

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  5. homepaddock says:

    The two sentences which matter in that link are: “The SNB will enforce this minimum rate with the utmost determination. It is prepared to purchase foreign exchange in unlimited quantities.”

    Our Reserve Bank has some power to purchase, or sell, foreign exchange, but we are such a small player on the global financial stage it would do little if any good.

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  6. Peter Hume says:

    The small player argument is valid if the RBNZ is trying to hold up the value of the currency. It does not apply if the aim is to prevent overvaluation. More details here: http://www.interest.co.nz/opinion/51253/guest-opinion-why-new-zealand-should-be-managing-its-exchange-rate-other-successful-economies#comment-586842

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  7. Peter Hume says:

    He said that he didn’t think the dollar should be devalued – not that it couldn’t be done.

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  8. homepaddock says:

    He makes it clear why it shouldn’t, though.

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  9. Peter Hume says:

    Does he? He said he is concerned about the high level of the dollar, but did not want to lower it.

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  10. homepaddock says:

    ‘This would amount to around a 25 percent devaluation, implying an exchange rate against the Australian dollar of just 58c. That means a drop in income and living standards across the board in New Zealand of about 20 percent. If they think there is a gap between us and Australia now, then following the Manufacturers and Exporters Association call for a 25 percent devaluation, that gap would widen into a chasm and thousands of New Zealanders would be leaving for Australia because of its much higher standard of living.’. – that’s very clear to me.

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  11. Peter Hume says:

    That is all based on a misquote. You can see NZMEA comments above. Do you think the NZD is overvalued?

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  12. homepaddock says:

    The value of our dollar against the US one makes it more difficult for exporters. But what’s the right value and how do we get there without other unpleasant consequences?

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  13. Peter Hume says:

    Yes those are debates we need to have. Here are some other options: http://www.johnwalley.co.nz/147-price_or_volume.aspx

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