NZ dollar to stay higher for longer - bank economist

The long term value of the New Zealand dollar won't be reducing in value any time soon.

Asia's economic boom has pushed the kiwi to a new longer term high – and demand for New Zealand products from Asia is likely to keep it high.  

“It is likely that the New Zealand dollar will average closer to 75USc going forward rather than the 57USc average for the first 20 years of its float,” said ASB Bank chief economist Nick Tuffley.

For the rest of this year, he said, the currency is likely to remain even higher – the New Zealand dollar is unlikely to dip below 80USc before next year, he believes.

But the longer-term shift will not just be the New Zealand/US cross-rate, but also the New Zealand/Australian dollar cross-rate.

The New Zealand dollar will probably be more affected, over the longer term, by growth in Asian markets than the Australian dollar will be, he said.

“Asia’s structural economic change should have a longer lasting impact on the New Zealand dollar compared to the estimated impact on the Australian dollar,” Mr Tuffley said.

The reason for this is Australia’s main benefit from the epochal shift in the Asian economies – dominated by China, but with India and other countries such as Vietnam following suit – has been in sales of ‘hard’ commodities used for infrastructure building.

That growth will tail off, in comparative terms, while the demand for ‘soft’ commodities – protein-based agricultural products, in which New Zealand specialises – will only continue as the emerging Asian middle class keeps growing.

“The demand for agricultural commodities, driven by income growth, should extend beyond the demand for infrastructure building (hard commodities), which has caused the structural shift higher in the Australian dollar. Hence, we believe Asia’s structural economic change should have a longer lasting impact on the New Zealand dollar compared to the estimated impact on the Australian dollar.”

New Zealand sends about 40% of its merchandise exports to Asia - over 60% when Australia is included.

“ Over 50% of New Zealand’s exports are agriculture commodities, with dairy accounting for around a quarter of total exports. We believe that rising incomes in the Asian region will generate a long‐run demand for agricultural commodities, with the New Zealand economy better placed than most to service growing Asian demand for agricultural products.”