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Technically Speaking: NZ Ltd cut out of financial loop

Friday 7th July 2000

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The perils of a minuscule nation operating a free-floating currency have come to the fore as concern mounts over the foundering kiwi. As the charts show, the kiwi has been in a bear market against the US dollar, the yen, the pound and the Australian dollar not just since last November's election but for some years before it.

The long-term decline against the Australian dollar should put paid to assertions the transtasman currencies are closely linked. The kiwi was plunged in a nosedive all of its own. The currency is being dumped across the board.

The crash of the kiwi in recent years can be taken as the international verdict on New Zealand as an economy under both National- and Labour-led administrations. Both parties, it seems, have failed to fire international investor enthusiasm since they became anxious to emphasise the "New Zealand experiment" was well and truly over. Labour has had Sir Roger Douglas to live down, so it thinks, while for National the bogey has been Ruth Richardson.

It is no coincidence both former finance ministers are now in the economic reformist Act New Zealand party. The plodding parties they exited, Labour and National, are the woolly mammoths of our economic tundra. Both parties regard fundamental economic reform as something to be undertaken reluctantly only as crisis management rather than as a continuing commitment of the contemporary state in the post-information age era.

The state these days should see its primary foreign policy goal as attracting overseas investment capital and its primary domestic policy goal as ensuring the economy is worthy of foreign investment. Ireland has done this successfully but New Zealand has lost its way. Our wretched currency tells us so in no uncertain terms.

New Zealand Ltd has been cut out of the international capital loop, as our soft dollar shows. Another way of putting matters is that New Zealanders are collectively poorer by the degree to which their currency has weakened against main foreign currencies of comparison. Accelerating numbers of economic refugees streaming out of New Zealand will notice their growing impoverishment upon cashing up their kiwi assets and converting to foreign exchange.

The sharemarket in New Zealand shows quite a close linkage to our floating currency. As a general rule, if the currency rises so too does the sharemarket. Foreign investors hope to add an exchange-rate increase premium to their locally earned dividends and capital gains as the currency goes up.

The effect was particularly noticeable in the pre-monetary conditions index period when the Reserve Bank had an explicit policy of increasing the value of the kiwi annually against the currencies of our trading partner nations. In retrospect, it may be that the policy was abandoned too soon.

When the New Zealand dollar falls so too, generally, does the sharemarket. A falling dollar costs foreign investors an exchange-rate discount on dividends and capital gains. As these investors sell out, they cause the trend of the dollar's decline to extend further. Those lamenting our feeble sharemarket should bear in mind that matters are worse for foreign investors who have not only lost in New Zealand dollar terms but also had losses superadded in their own currency terms due to the kiwi's collapse. New Zealand is looking like the Russia of the South Pacific and its currency resembles the rouble of the Antipodes. Perhaps it is currency union with Russia rather than the US or Australia we should seek.

Chartists will be watching graphs of kiwi exchange rates to pick if any rally could be the beginning of an uptrend in foreign investment into the sharemarket. If foreigners become convinced at some point that risk for the kiwi lies on the upside, their funds should return in pursuit of our shares. A lift in the currency charts should therefore precede a rise in the sharemarket graphs. Right now the currency charts argue local sharemarket investors should hang fire. In the meantime they might ponder whether New Zealand needs a currency board such as Hong Kong's to stabilise our orphan dollar.

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