8 Apr 2015

NZ dollar rise reflects economy strength - PM

2:31 pm on 8 April 2015

The dollar's near parity against the Australian currency reflects in large part the strength of the New Zealand economy, says Prime Minister John Key.

060514. Photo Diego Opatowski / RNZ. John Key after the Prebudget speech in Shed 6 , Queen's Wharf. Wellington.

John Key speaking to media before last year's Budget Photo: RNZ / Diego Opatowski

This morning the dollar was trading around 99.3 Australian cents, after reaching a high of 99.78 yesterday - just shy of equal rating for the first time since it was floated 30 years ago.

Mr Key said the strength against the Australian dollar also reflected the perception among those who price currencies of which economy is in better shape.

"It is weakness in Australia as well ... but I think over the last six or seven years we've seen a growing confidence in New Zealand businesses." he told Morning Report.

"They've used the historically high exchange rate, particularly against the US to buy a lot of capital equipment and to upgrade their businesses and build new markets."

Mr Key acknowledged many exporters were not happy with the situation but encouraged them to continue to invest and drive productivity. New Zealand firms were doing well on the international stage, he said.

'Reflects economic fundamentals'

Former Reserve Bank chair Dr Arthur Grimes, now of non-profit economic and public policy research group Motu, said the strength of the New Zealand dollar against the Australian dollar reflected the economic cycles both countries are going through.

He said New Zealand's high dollar showed the strength of the country's economy.

"When New Zealand's strong, our dollar goes up, relative to Australia - when their economy's very strong, relative to ours, their dollar goes up, relative to ours. It's a very well-behaved currency, in that way - it reflects economic fundamentals."

'Long term view'

Manufacturers and Exporters Association president Tom Thomson said exporters would struggle because of the fall in the Australian dollar's value.

"You don't dodge in and out of markets easily, you try to hang in there for the good times and the bad, but I don't think that's going to be sustainable," he said.

Philip Gregan, chief executive of New Zealand Winegrowers, said although wine exporters were unhappy with falling returns, they were trying to take a long term view.

"Some producers may be thinking about diverting supplies to other export markets such as the US or the UK, but most of the winemakers are committed to the Australian market, so they don't want to do that."

According to the New Zealand Trade and Enterprise website, Australia is New Zealand's second largest bilateral trading partner, with two-way trade worth $23.9 billion.

New Zealand's exports to Australia are primarily crude oil, gold, wine, cheese, freshly-prepared food and silver.

Labour party leader Andrew Little said the exchange rate was because of the weakness of the Australian economy which is suffering from falling iron ore prices.

The reality was New Zealand's economy faced major headwinds, he said, of falling dairy prices, a lower dollar against other major currencies and an out-of-control housing market.

Mark Lister, head of private wealth research at Craigs Investment Partners, said although some people saw an Official Cash Rate cut as a solution to the strong Kiwi, the Reserve Bank was in a tough spot.

"I don't think the Reserve Bank really wants to be forced to reduce interest rates to target the currency, because all that will do is add fuel to the fire with Auckland housing," he said.

"They sort of want to keep us on a steady path. I don't envy them at all. They are in a difficult position."

Mr Lister said the recent spike this weekend was mostly due to the Reserve Bank of Australia expected to further cut interest rates later today.

"The Reserve Bank of Australia cut interest rates in February, so they are now sitting at 2.25 percent, remember New Zealand's OCR is 3.5 percent, so there is already a gap there and that gap is likely to widen," he said.

Commodity demand slowdown

Mr Lister said China has had an impact on the situation, with a slowdown in demand for commodities such as iron ore putting pressure on the Australian economy, while New Zealand has been doing well.

The price of iron ore dropped to a new record low of $US46.70 at the weekend, compared to $US120 per tonne this time last year.

The strong dollar is good news for holidaymakers wanting to travel across the Tasman, and Brent Thomas of House of Travel expects 70,000 to 90,000 more New Zealanders to visit Australia over the next 12 months.