Soaring exchange rate could hamper recovery

The often-touted export-led recovery could be threatened by a soaring exchange rate which some economists believe could reach US69c.

At 5pm yesterday, the currency was trading at US67.33c having opened at US66.99c.

On Friday it closed at US67.07c.

National Bank chief economist Cameron Bagrie said while it was widely acknowledged the exchange rate should be lower, he said global and local pressures were causing it to fluctuate, which could hinder that happening.

Sentiment about the New Zealand dollar was caught between better-than-expected United States economic news prompting some to view it as the right time to buy the US dollar, and the view that that good news could mean better global economic growth, making it the time to buy commodities, which put pressure on the kiwi.

Mr Bagrie said the world economy was in a stronger position this week than last, and that should drive growth and ultimately the value of the New Zealand dollar.

Ironically, news last week of a 26% increase in prices for Fonterra's online milk powder auction, could underpin currency strength in the short term.

He said the kiwi could be pushed higher before the realities of bad local economic data forced sentiment to wane and the currency to fall.

New Zealand's economic recovery was tenuous and Mr Bagrie said farmers and rural areas were only now starting to feel its impact, forcing farmers to lock their cheque books away.

"New Zealand has been in recession for 18 months.

In 2008, it was an Auckland recession and nobody cared.

The South Island had a relatively good 2008, but in the last three months that perception has changed as it flows through to rural economies."

Fonterra recently announced the high exchange rate had wiped 10c/kg of milk solids off its forecast milk price this season, but better-than-expected profits had added a another 10c/kg milk solids to that forecast.

Meat company Alliance Group told farmers last week that if the exchange rate was at current levels, it would revise down by 10% its forecast prices for next season.

Of concern to meat exporters was Mr Bagrie's prediction the kiwi could also rise above 0.47, affecting the sector's most important and valuable sheep meat market.

Mr Bagrie said exchange rate pressure could be alleviated by structural change to the economy, such as improving our poor savings record.

Westpac chief economist Brendan O'Donovan yesterday warned against lowering the official cash rate, saying it could worsen the economy's imbalance.

"New Zealand's current account deficit reflects a dearth of domestic saving, excessive housing investment and a less than spectacular net export position.

"Lower interest rates would likely lower domestic savings, lift consumption and raise investment, at least in the short term, and increase imports."

The net effect could be a higher not lower exchange rate.