This week we have hit two contrasting records for the Kiwi dollar. Our Kiwi dollar is now higher against sterling, at around 46p per NZ dollar, than it has been for more than 25 years. It is only a few years ago it was 28 cents. Yet against the Aussie, the Kiwi has hit a low of under 77 cents, which has not been seen since 2000. Should it drop to 74 cents then we would be in territory not seen since 1992.
The strong Aussie is great for exporters to Australia, and should give a real fillip to manufactured exports. By contrast, exporters to Britain, which is of major importance to our lamb industry, will struggle. Britain is also a major market for our wine industry.
Trying to prognosticate on where the Kiwi will go from here can be a dangerous game. I have been watching the predictions of the major bank commentators for years, and I know they get the direction wrong as often as right. Actually this is not too surprising. Complex economic theory, called expectations theory, and for which Nobel Prizes have been won, tells us that the current price is close to the market’s best bet as to where the future market will be, at least for the next year or so which covers most of the futures trading. Of course it won’t stay where it is now, but it could go in either direction.
In some ways it is easier to predict the long-term direction over three to five years rather than the short-term volatility over the next year or so. The evidence there suggests that over time the British pound will decline further and the Aussie dollar should continue to rise. That will make Britain less attractive as an export destination, but Australia should hold up. In the case of Britain, their Achilles heel is that the North Sea oil and gas is fast running out, and Britain is already a net importer. It can only get worse for them. But across the Tasman, the epithet of ‘the lucky country’ is truly back in vogue. With China back on track with growth around double digits, the demand for Australian minerals is heading north again.
This has important implications for those of our export industries that still depend on the old mother country. In the case of lamb we are going to have to put more effort into the new markets such as China. The British are not going to pay more than they are now.
In the case of wine, Australia has already overtaken Britain as our most important export market. But our dependence on the British market remains uncomfortably high. Indeed we only have three export wine markets of any significance: first Australia, then Britain, then the USA. I have also seen New Zealand wine in Hong Kong, and even in the inland Chinese city of Chengdu. But there are many bottles of Australian wine to be seen in China for every NZ bottle. Over in Australia, the Sydney folk, particularly the well-heeled female singles, have taken to the NZ Sauvignon Blanc in a big way. Long may it continue, because we have some big wine inventories building up on this side of the Tasman. As one winemaker said to me a few months ago, with a shake of his head, this wine business was meant to be fun.
Professor of Farm Management and Agribusiness