ep 401 | What’s going down with the NZ dollar?
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What is the main topic discussed in this episode?
On point with Craig's Investment Partners. The information provided here is general in nature and it's not financial advice. It doesn't take into account your situation, objectives, goals, or risk tolerance. All investments are subject to risk and none are guaranteed. Before you make any investment decisions, we recommend you contact an investment advisor. For more information about our services or to view the Craig's Investment Partners Financial Advice Provider Disclosure Statement, please visit. our website which is craigsip.com. Welcome to On Point. I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education and anything else that's happening out there in financial markets.
Why has the New Zealand dollar weakened against major currencies?
In recent weeks and months, the New Zealand dollar has weakened against many of our trading partners. It's doing exactly what you'd expect it to do against a shifting economic backdrop and widening interest rate differentials between ourselves and many other countries. Whether these moves are good or bad, well, that depends on your perspective. The Trade Weighted Index, which measures our currency against a bargain Of other currencies is down more than four percent over this last month. It ended last week at levels we hadn't seen since March 2011. That's more than 15 years ago. The exchange rate that gets all of the attention is the one against the US dollar, the New Zealand dollar US dollar cross rate.
And at the moment that's just under US 57 cents. So we are somewhere below. The long-term average over the last 25 odd years, which is about 66 cents. The New Zealand dollar is also sitting close to a 13-year low of almost 80 cents against the Australian dollar. We're just above those levels. And it's also more than 10% below its long-term average against the Euro. The one major currency that we have been strong against in recent years has been the Japanese yen. But even the yen has staged a bit of a comeback lately too. So we're still well above the long term average against the yen, but the New Zealand dollar has slipped back from that record high it reached two years ago.
How do interest rate differences affect the NZ dollar?
Currency markets are where the growth outlook, inflation expectations, and interest rate differentials all intersect. And right now, New Zealand is in a tougher spot than some others. Our economy has been fairly sluggish, and while our Reserve Bank has lifted interest rates, the OCR is still well below many of its offshore counterparts. That is quite unusual, as normally Our interest rates, our OCR is typically higher than other regions. That's been the case for the past few decades. Let's look at New Zealand and Australia just as an example. Now, until this year, our OCR had spent 70% of this century, 70% of the time since 2000, higher than the Australian cash rate. However, today we're at At 2.75%, and they are at 4.6%.
That is a gap that we've only seen the magnitude of once before. And that was back in that 2010 to 2012 period. And unsurprisingly, that was the last time that our currency was this slow against the Aussie dollar. That's what I mean when I say these things are all interlinked. And that lower interest rate, that lower OCR, makes us a less attractive proposition for global capital. So that's why that money is choosing to go elsewhere and that puts downward pressure on the Kiwi dollar relative to other currencies. Sentiment has also become a bit more cautious as geopolitical tensions have risen, you've got the conflict in the Middle East that's been escalating, and the list of things to worry about has just got a little bit longer.
How does a weaker New Zealand dollar benefit exporters and tourism?
However, it's not all bad. A weaken New Zealand dollar is a really important shock absorber for us, and it can be a very effective one. A lower currency is a tailwind for the export sector, it makes us more competitive internationally, and it pushes up the value that we get for goods we're selling overseas. So that benefits the farming sector as the most obvious example, but tourism is another.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:00–0:47
2
Why has the New Zealand dollar weakened against major currencies?
0:47–2:17
3
How do interest rate differences affect the NZ dollar?
2:17–3:55
4
How does a weaker New Zealand dollar benefit exporters and tourism?
3:55–4:47
5
How does a falling NZ dollar increase inflation and imported costs?
4:47–6:10
6
How can currency movements affect returns on international investments?
6:10–8:10
7
Should investors hedge currency risk in overseas shares?
8:10–9:28
8
What is the ideal exchange rate for the New Zealand dollar?
9:28–10:18
Speakers
1 identifiedMore from On Point
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