Another Kiwi brain that went to London - Lord Rutherford, also changed paradigms
Kiwi economist Robert Slade is visiting from London to deliver some sage advice to his homeland. ”The Bretton Woods system, with limited private capital flows as one of its pillars, served the world well for several decades after World War II. In particular, it helped to ensure stable growth of trade, without the disruptions to exchange rates caused by volatile capital flows.”
July 2007. The New Zealand dollar posts a 2 decade high at 98 yen. But in just 18 months it will crash to be worth less than half that, at 45 yen. This dramatic swing is not an isolated event. Over the last 20 years the Kiwi unit has been through 3 such radical cycles. It is buffeted by oscillating world commodity prices, and investors chasing or leaving our volatile, but persistently high, interest rates. The particularly scary thing is that the magnitude of these currency oscillations seems to be increasing over time.
An astute speculator, who bought Japanese yen with NZD1,000 in 1991, would have over NZD12,000 in 2009. Not a bad before-tax return at all. It assumes the speculator converted between the two currencies at optimum points 5 times during the 18 years, and invested at average bank deposit rates. For the Japanese yen, interest rates have been close to zero for most of the period. But in New Zealand they have averaged a stunning 6 percent.
This perfect speculator would be like a top yacht racer, choosing exactly the right moments, but no too many times, to tack up the beat to the top mark. She would be on starboard tack (say in NZD) when the wind was lifting that side, then tack over to port (JPY) to catch the good angle when the wind swung over. Knowing that there is a small speed cost for each tack made, she will only tack when confident the subsequent gains will more than offset that loss.
Just like the NZD and JPY, neither starboard nor port tack is inherently better than the other. But one tack is superior to the other at a given point in time when the wind has shifted in favour of it. One tack will be “paying”, as our sailing commentators often find it convenient to use the reverse financial metaphor. Our winds generally oscillate back and forth, allowing sailors to take advantage of shifts first one way then the other. So too has our currency oscillated over the last 20 years, allowing those brave enough speculators to chance their hand at playing the shifts.
Of course, even the most astute of speculators would be unlikely to hit the optimum trading points (tacking points) 5 times in a row. But the predictability and degree of volatility of the Kiwi mean that many would still have done very well, thank you. With a currency like ours that jumps up and down like a yo yo, it is not necessary to be able to pick perfectly “when” to make a move. You simply buy it when it is cheap and sell it when it’s expensive. Even our own Prime Minister has noted
whenever the dollar went below US50c and above US70c, then one of the currencies was being undervalued or overvalued
(Caution, the author accepts no responsibility for any loss the reader may incur in currency trading).
The NZD/JPY cross is particularly interesting for two reasons. Firstly, Kiwis have borrowed a lot of their debt from Japanese. For 15 years Japanese have only been able to earn pathetic levels of interest in their home country, if anything at all. Kiwis on the other hand have been happy to reward them handsomely for putting their savings into our banks, from where the real estate bubble has been funded. Of course, we don’t even charge them tax.
Secondly, the yen has become the world’s ultimate safe haven currency, to use modern trading jargon, even displacing the Swiss franc and US dollar from their long held primary conservative roles. The Kiwi on the other hand is seen as one of the highest risk currencies in the OECD, due our small size, huge debt, and demonstrated volatility. You would have to go on safari for the South African rand or into the emerging Brazilian whatever to find higher risk (and potentially return if you have the stomach for it).
Therefore, movements between the yen and the Kiwi tend to be extreme. When the wind is blowing risk adverse, the JPY is the tack to be on. When the wind is blowing confidence and risk taking, the Kiwi is paying. Speculators stay awake at night reading the forecast for the next day when spectators enjoy the action.
New Zealand and Japan sit like blue and yellow canoes at opposite sides of the Pacific currency match racing circuit. Interestingly if you mix the two colours you get green, which we would both like to be known as in our respective industry strengths. Manufacturing for Japan and land-based for New Zealand.
All this match racing has little impact on the fundamental value of the yen, one of the world’s mega-currencies and a heavy weight. But our bantam-weight Kiwi dollar oscillates with the Pacific winds just like the zig-zag tacking tracks on Virtual Spectator.
The degree of volatility we tolerate in our currency is unusual and unbelievable for a tiny nation so dependent on international trade. It might be fun, risky and thrilling for currency speculators and sailors, but it makes it very difficult to be an exporter or importer trying to run a stable business.
But Slade has even more fundamentally profound advice than the need to control currency fluctuations.
Western nations may well be in for a period of sustained turbulence over the next decade, fuelled by income inequality, fiscal austerity, energy uncertainty, the rise of large, super-competitive non-Western states, climate change, and the need for far-reaching respecialisation of Western economies.
New Zealand is one economy that seriously needs to consider far-reaching respecialisation, given our inability to live within our means on our current track. A Green Brand New Zealand Strategy would be a good start.
Possibly related posts: (automatically generated)
- Related posts on financial volatility
- How to Invest in Gold
- Welcome 2010!
- Churchouse appoints New Relationship Manager for 2010
- Related posts on Kiwi dollar
- Global Market Outlook 1/11-1/15 Full Version: Key Market Movers …
- Kiwi dollar rises
- Left Hand and Right Hand – It’s about time you started Talking
- Related posts on Lord Rutherford
- Climate Action in 2010 | [ COPtv ]
- Greenpeace Australia Pacific » Blog Archive » Loo-loo-see-eff …
- Clean, Green and Expensive
Tags: 100% Pure New Zealand, clean & green, clean & green NZ, Clean and Green, clean and green New Zealand, financial volatility, Kaitiakitanga, Kiwi dollar, Lord Rutherford, Robert Slade, trade
[...] Far-Reaching Respecialisation of Economy Required [...]