INSIGHTS

One of the biggest financial market stories in New Zealand of the summer break has been the resurgence of the NZ dollar. On a trade-weighted basis, the currency has rebounded to a three-month high, about 4.5 per cent above where it fell to in November.

The exchange rate that gets the most attention here is the one that measures our currency against the US dollar. This is unsurprising, as the greenback remains the primary reserve currency of the world.

The US is also our third largest export market (behind China and Australia), taking 11.3 per cent of our goods and services. Almost all commodities are priced in US dollars, including the main ones we sell such as milk and other dairy products.

Our currency has been very strong against the US dollar recently, rising some six per cent compared to the November average. In recent days, it’s traded above US$0.73 for the first time since before the election.

It might seem a little strange the US dollar has been so unloved of late, especially considering how strong the economy is looking and with US interest rates undoubtedly on the way up.

However, currency traders seem more focused on the other side of the Atlantic at present, where the euro has caught many off guard with just how strong it’s been.

The euro is at a three-year high against the US dollar, as the region has shrugged off the political drama of recent years and the economy has gained some serious momentum.

Germany's IFO Business Climate survey, which began in 1991, hit an all-time high in November, while manufacturing indicators are the strongest in two decades.

This has made people reconsider how long the European Central Bank (ECB) will be able to persevere with its ultra-loose monetary policy.

Consequently, the NZ dollar is more than five per cent below the average of the last 12 months against the euro, in contrast to being up against the US dollar.

Some of these moves will be due to local factors as well. Economic news has been solid over the last few months, with GDP growth figures released in December looking better than many expected.

It’s also quite normal for the NZ dollar to perform well when financial markets are in an optimistic mood generally.

The global investment community might also be starting to relax about our change of government. The NZ dollar sank 7.5 per cent against the US dollar in the eight weeks following the election, but now we’re right back where we started in the week before polling day.

For the average person, the stronger exchange rate will be softening the blow from higher fuel prices, with crude oil up 40 per cent since the middle of last year.

Dairy farmers won’t be quite so happy. They would’ve been more back in November at around US$0.68, rather than up at today’s levels.

Other exporters and importers will have mixed feelings about the moves, depending on which part of the world they’re selling to and buying from.

Let’s see how that all feeds through to the latest CPI figures next week, given that 44 per cent of the price basket is made up of imported goods.