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Politicians brawl as banks adjust currency forecast

A war of words has erupted between the Opposition and the Government over the falling value of the Kiwi dollar, Thomas Coughlan reports.

After spending much of their time in Government trying to jawbone down the dollar for the sake of exporters, National is now leaping on the fall in the currency as proof that international money markets are losing faith in the New Zealand economy under a Labour Government.

Finance Minister Grant Robertson and National's finance spokeswoman Amy Adams spent much of yesterday debating the drop in the dollar, which remains at two year lows.

The currency took a tumble last week after Reserve Bank Governor Adrian Orr said interest rates would remain “low for longer”, indicating he would not raise the official cash rate (OCR) until late 2020.

The outlook worsened over the weekend as the Turkish Lira continued a precipitous fall, sparking fears of contagion to other emerging economies and possibly New Zealand. The lira fell 11 percent overnight, and has fallen 50 percent so far this year.

Adams acknowledged that New Zealand’s currency was vulnerable to international shocks, but said the dollar’s “very rapid” response to the Reserve Bank decision last Thursday showed the current fall was a result of international perception about our economy shifting.

“Increasingly we are seen as a weak performer internationally,” Adams said.

This was echoed by National leader Simon Bridges who said the low dollar was a result of the RBNZ governor's monetary policy statement, which was itself a reflection of Orr's pessimistic outlook about the economy.

“Orr has kept the rates lower for longer, that’s a reflection ultimately of his lack of confidence in growth in our economy,” Bridges said.

But Deputy Prime Minister Winston Peters was combative in defence of the economy under Labour, saying “Amy Adams knows nothing about currency”.

Peters pointed out the slump in the dollar was good for exporters.

“Out in the provinces where the real wealth is better with exports, that’s very, very good for them,” Peters said.

“Maybe 66 cents [against the US dollar] or thereabouts is where it should be all the time.”

The New Zealand dollar can be volatile and vulnerable to international fluctuations. At the height of the financial crisis, it fell from 80 US cents in March 2008 to just 50 cents a year later. This period also coincided with the change from a Labour to National Government.

Kiwibank Chief Economist Jarrod Kerr agreed the main catalyst for the fall was the Reserve Bank’s monetary policy statement on Thursday.

He said the market had appropriately priced in a 35 percent risk of an OCR cut in the next six to nine months, which had fed through into a lower Kiwi dollar.

A good outlook for exporters

The Government put a positive spin on the situation, noting a lower dollar will be good for exporters. The Reserve Bank still expects growth to pick up over the mid-term and expects some of this growth to be driven by exporters.

Robertson said a lower dollar would boost exports and help the economy transition to exports-led growth, a key goal for the Government’s long-term strategy.

"That’s something our exporters would want and we are in the transition to a more export-led economy so this is something we have to look at on balance,” said Robertson.

Prime Minister Jacinda Ardern agreed it would be welcome news for manufacturers and exporters.

“As the Governor for the Reserve Bank has said, he forecasts growth over the next two years to be based on the stimulus of the Families Package but also the strength of Exporters,” she said.

Bridges and Adams also conceded the low dollar would be good for exporters, but cautioned this should be offset against potential price increases for consumers.

Banks expect dollar to fall further

There have been muted fears from banks that the drop in the Turkish lira could spill over into other emerging market economies and eventually to New Zealand.

BNZ interest rate strategist Nick Smyth suggested this as a potential possibility in a note on Monday.

A note from ANZ said the bank expected the dollar to fall to 62 US cents in December, before hitting 61 cents in March 2019, where it will level out.

Kerr told Newsroom Kiwibank had also adjusted its forecast for the dollar. It had initially expected the dollar to fall to 65 US cents next year. It now expects the dollar to stay at 65 US cents before moving to 63 US cents next year.

He said the fall put the dollar “where you’d want it”.

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