The New Zealand dollar experienced a roller-coaster ride in 2011, due to earthquakes, funding deadlocks, and international concerns. The credit rating downgrade for the United States and the turmoil in Europe both had a big effect on the local currency, and with the euro crisis not going away any time soon, it will be interesting to see what 2012 has in store.
After experiencing a 16 percent trading range in 2011, it is remarkable that the dollar closed the year only 2.7 percent down from the start of 2011. However, while the local currency may have faired quite well in a year of local natural and global economic disasters, there are many questions still plaguing the markets for 2012. Depending on how the euro crisis is managed, the New Zealand dollar could steer in either direction.
According to Derek Rankin, a director at Rankin Treasury Advisory, Europe will pull itself up by the bootstraps and enjoy stable growth as the euro zone deleverages. In a statement to stuff.co.nz, Rankin said “We know that the New Zealand dollar moves about 17.5 per cent per year (on a long term average basis), meaning if we see a plan tabled that the market can accept we could finish the year in the US80c range.”
Not everyone is so optimistic however, with Imre Speizer, a market strategist at Westpac, expecting a much rougher six months ahead for the euro zone. “Our best guess is that over the first half of the year we’re looking at fairly bleak outcomes to the euro zone crisis. We think it will get worse rather than better,” said Speizer in a statement to stuff.co.nz.
While it is difficult to quantify the impact of the euro crisis and its flow-on effects within Asia and the Pacific, there are some things we do know. Europeans will generally have less money to spend, which will affect both the export and tourism sectors in New Zealand. If the local currency appreciates against the Euro, like many analysts are forecasting, there will also be a strong impact on our ability to compete in global markets.
There are also likely to be follow-on effects in terms of access to credit, with credit packages for Greece, Italy, Ireland, and Portugal reducing the availability of credit to other nations. Even small increases to the cost of borrowing will have an adverse effect on the local New Zealand economy, which is heavily dependent on the rest of the world for its long term growth prospects.
While there will certainly be many challenges to meet over the next 12 months, it remains to be seen how much the ongoing crisis in Europe will affect the New Zealand dollar. The currency markets are likely to remain volatile for at least the medium term however, as policy-makers in Europe attempt to manage the ongoing sovereign debt crisis in the coming months.
