Currency outlook tough for 2013

If exporters thought this year was hard going, then 2013 is shaping up to be even tougher if the pundits prove correct and the New Zealand dollar continues to grind its way higher.

When the New Zealand dollar appreciates, exporters' returns diminish as they repatriate profits from offshore into fewer and fewer kiwi dollars.

These days, exporters are less inclined to grizzle about the strength of the currency; they are now more likely to focus on the policies behind it.

Foreign exchange analysts, citing strong commodities prices - particularly for "softs" - and the likelihood that monetary conditions will remain firm over 2013, will drive the Kiwi higher next year.

Westpac senior market strategist Imre Speizer said in a commentary that New Zealand's economic recovery should gain momentum next year, which will encourage the Reserve Bank to raise its official cash rate in September.

"Combined with quantitative easing pressure on the US dollar, the New Zealand dollar should make a run at the US88.45c record (2011) high," Speizer said.

The trouble with this year has been the currency's persistent strength. In previous years, there have been dips, which have allowed exporters to do their hedging at lower rates. This year, the currency has spent about 70 per cent of its time above US80c, and dips have been few and far between.

John Walley, chief executive of the New Zealand Exporters and Manufacturers Association, said some of the association's members are bracing for a challenging 2013, currency wise.

Some of the local currency's strength comes down to the relatively tight monetary policy settings already in place, which make the currency attractive to yield-seeking foreign investors.

On that score, exporters seeking respite from a high currency are unlikely to get much of a hearing from Reserve Bank Governor, Graeme Wheeler because the market regards the new governor as a "hawk" and less disposed towards cutting, in contrast to his "dovish" predecessor, Alan Bollard.

Walley says investment in elaborate manufacturing in New Zealand stopped dead its tracks around four or five years ago because the currency just got too difficult for most to handle.

"It really is not worth the trouble and it's certainly not worth the risk in throwing more money at it," he told APNZ. Next year, he expects the currency to take an excursion into the high eighties.

"You will tend to get the traders pumping and dumping it, so we can see a US82c to US88c range," he said.

A global calamity, such as another blow-up in the Middle East, could see the currency dip to sub 80c levels, but otherwise Walley sees more currency-related pain for exporters next year.

He says at US82c, exporters are not making much money. At US85c, they don't make any.

When the currency gets that high - it comes down to the old dilemma - do exporters bite into margin to keep market share or do they withdraw from the market completely?

"If you withdraw, that means re-sizing," Walley says. "That means job losses, and all the other things that go with it," he says.

He complains that for all the regulatory hoops that exporters need to jump through to get their product to market, there are no rules covering the international capital flows that can drive the Kiwi sharply higher or lower on any given day.

"People are devaluing their currencies and there are all these problems around trade. All the while we have unrestricted capital flows, yet capital flows are buggering around with exchange rates and returns for trade," he said.

Walley's concern for exporters is shared by Bank of New Zealand currency strategist, Mike Jones, but he says the currency's strength is simply a reflection of where the economy finds itself now.

"Our concern is essentially about there being little relief for exporters, and we think that the fundamental drivers are in place to keep the currency very strong throughout all of next year," Jones says.

"We think pull-backs below US80c are going to be quite limited and shallow, and I guess we see the currency trading in this US80c to US85c range that we're becoming increasingly used to," he says.

The US Federal Reserve has said it will keep monetary policy at very accommodative levels until it is convinced the US economic recovery is self-sustaining. Jones is optimistic that such a recovery is not far off.

"There is light at the end of the tunnel for exporters, and the signs out of the United States are quite positive," Jones says.

"Should these signs continue - and we expect them to - we'll start to see a stronger US dollar emerge late in 2013."

That stronger US dollar will be the key ingredient for a lower, more exporter-friendly Kiwi, Jones says.

"The correction is not going to happen on the kiwi side. It is going to happen on the US side."


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