Be careful what you wish for. Exporters in New Zealand who have been crying over the devastating impact of the strong currency should take some time to reflect on whether a weaker dollar will really ease the pains of building a solid and sustainable business.
The reigning sentiment says the New Zealand dollar is overvalued. Those who have voiced this sentiment include the International Monetary Fund, which thinks the Kiwi is inflated by about 15%, Reserve Bank governor Graeme Wheeler, and lately Prime Minister John Key.
The truth is everybody around the world has had a love affair with the Kiwi for quite a while now. The New Zealand dollar was the tenth most actively traded currency in the world in 2013, with over $27 billion dealt daily.
Smart money flows to where the best deals are to be found. That’s why uridashi bonds (Japanese foreign currency-denominated securities sold directly to mum and dad investors) have been a spellbinder for the Japanese. Mrs Tanaka or Mrs Nori can easily borrow money in Japan, at zero interest, to invest in Kiwi-uridashi bonds paying decent interest rates.
As an indication of how frenzied the demand for uridashi bonds is, in 2006 Aussie- and Kiwidenominated uridashis accounted for 80% of the bonds in issue. While this share dropped to 30% in 2013 it has started climbing back to 40%.
Despite the Kiwi heading for some correction, dipping below the 80c to the US dollar level at the time of writing, truth be told, it is better for exporters to brace for an environment of strong currency rather than wish for a weak currency.
History has some great examples of why New Zealand should focus on building an economy powered by strong, well-governed and savvy companies that can battle the worst conditions, rather than being those which shelter under the roof of a weak currency. Incidentally, a lot of basket case economies have weak currencies, but that’s all they can boast of.
Fundamentally, a business that succeeds based purely on price attractiveness hasn’t got enough sinews to be sustainable over the long term. A better business is one built around the philosophy of being the preferred supplier based on a whole host of reasons, rather than based around price.
Sure, it is always going to be crazy difficult – but crucial – to manage wild currency fluctuations. A company can have its margins wiped out when the exchange rate moves 10%- 20% within a few months.
But a weak New Zealand currency will do more harm than good in the long term. Sure it will help sell a few more widgets. But it will also breed complacency, dampen consumer sentiment, hamper our ability to repay huge debts, and ignite imported inflation.
The last few years of a strong dollar has given exporters reason to think a lot harder, to scrounge for efficiencies, and find innovative ways to deliver a better product. Some companies, especially those in software and the high-tech manufacturing sector, have done incredibly well. Their greatest achievement is finding growth despite what can be term as a ridiculously high currency environment.
These companies should serve as a reminder that success comes to those who learn how to adapt to volatility. The Ludwig von Mises Institute, a US-based economic think-tank, has examples from other economies. In the UK, the institute notes, sterling has dropped 25%-30% since 2008, yet the depreciation has done little for the pallid UK economy.
Meanwhile the Japanese yen, which has appreciated over the last four decades against the greenback, has grown exports. And a weakening greenback has done little for America’s tradable sector.
Smart money is also often heartless money. There is no loyalty, and no sentiment involved when fund managers chase the highest yielding assets. The US and Europe have been in quantitative easing mode for a while now.
When interest rates start creeping up in the northern hemisphere, be prepared for some dumping of New Zealand dollars and a spiralling downwards of the Kiwi. But hold off on the celebratory fireworks.
This article first appeared in issue 55 of Idealog magazine
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