Currency incentive for exporters?

Better meat prices for farmers could come from a strengthening Australian economy. Photo by Neal...
Better meat prices for farmers could come from a strengthening Australian economy. Photo by Neal Wallace.
The ongoing rise in the value of the Australian dollar against the United States currency could give exporters a much wanted lift in prices, particularly after the recent harsh winter.

The loss in lambs and dairy production in Southland is expected to cut deeply into economic growth, which already came in much lower than expected in the June quarter.

Tens of millions of dollars have been wiped off combined farming business sheets, making a fall in the New Zealand dollar much more important now than it was in the earlier part of the year.

It was a mixed result for the kiwi last week, posting gains against a weak US dollar but slipping against the Australian. The kiwi was also down on the euro but little changed against the pound and yen.

Any fall in the kiwi against the Australian dollar is of major benefit to New Zealand exporters with Australia still this country's largest export market.

ASB chief economist Nick Tuffley said yesterday volatility was relatively low in markets.

The main themes were US dollar weakness and Japanese intervention.

Late last week, the US dollar reached its lowest level since February, although it did get some initial support on Friday night on talk the Bank of Japan had again been in the market trying to weaken the yen.

"Gains were quickly reversed when the Japanese Prime Minister [Naoto Kan] said he was unaware of any intervention."

Yesterday, the Australian dollar broke through the US96c barrier to reach a two-year high, buoyed by a strong US equities performance on Friday.

Speculation is increasing that the Australian dollar could reach parity with the US currency if US sharemarkets continue their good run.

Craigs Investment Partners broker Chris Timms said although the US domestic economy was not strong, the sharemarkets had improved in recent weeks.

As investor confidence rises, that tends to drive markets up as investors are willing to seek a higher level of risk.

Australian and New Zealand dollars were seen in that riskier category.

However, Australia was seen as the place to be, he said.

"Investors are pushing money off shore and the Australian economy is looking really strong with metals and mining.

Investors want a piece of that."

New Zealand was not seen as such an attractive investment destination because the differential between the official cash rate and the US central lending rate was not as wide as it was with the Australian cash rate, Mr Timms said.

Australia was forecasting continuing GDP growth and increased interest rates.

New Zealand exports mainly wool, dairy products, steel, beef and lamb, and clothing to Australia.

Any improvement in export prices to Australia would be a boon for the beleaguered farming community.

Exports to the US could be hit by a falling US currency, making New Zealand products more expensive.

A lower kiwi would make imported goods more expensive, a way of rebalancing the economy towards an export-led recovery one that was consumer-led, Mr Timms said.

The Reserve Bank was expecting the New Zealand dollar to gradually depreciate.

"It is forecasting it to hold its ground for the rest of the year and then fall 6% over the next two years, implying a trade-weighted index of 62.5 at the end of 2012," he said.

Mr Tuffley said ASB had updated its currency forecasts.

The NZ dollar forecasts had been lifted slightly.

The near-term lift was driven by rising New Zealand terms of trade and US dollar weakness rather than the New Zealand's economy's domestic strength.

Currency volatility remained low and was trending lower.

Reflecting the lower volatility, episodes of risk aversion in the future were likely to be smaller and less frequent.

"When volatility is low, relative economic health becomes a major driver of exchange rates.

"With this in mind, we have revised up our forecasts for the Australian and Canadian dollars as well as the NZ dollar forecasts.

"These economies continue to benefit from rising terms of trade and upward pressure on local interest rate settings.

The Australian dollar, in particular, is likely to out-perform over the coming months," Mr Tuffley said.

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