Why A High Exchange Rate Is Good

A high exchange is good because it increases New Zealand’s global purchasing power.

Because our grey-haired corporate elite have consistently failed to innovate outside of a handful of well run companies, we desperately rely on imports for the cool things we can’t make here.

This means that a high exchange rate papers over New Zealand’s pathetic track record in economic growth and “100-bagger” innovation.

It also means that the most marginal manufacturers will go to the wall because they’ve failed to add enough value to make exchange rate changes unlikely to erode their margins.

If I was a manufacturer in New Zealand, I’d be asking – how can I reimagine my entire business so it is still profitable if 1NZD = 1USD? How can I move from razor thin margins to fat margins that reflect enormous value creation?

We have no idea what will happen to the exchange rate because of the massive liquidity bubble sloshing around the globe because of quantitative easing in the US.

But if you fail to build in the possibility of dollar parity to your business model, you deserve to go to the wall. You have no right to blame a high exchange rate for your inept business management.

Hong Kong’s Exchange Rate Stability

Since 1983 the Hong Kong dollar has been linked to the US Dollar at a rate of HKD7.8/USD1.00. The Hong Kong Monetary Authority, through the Currency Board, has maintained this stable exchange rate through a plethora of macroeconomic shocks and against rising prosperity in Hong Kong that could easily justify a significant appreciation against the US Dollar.

While Hong Kong can be hurt by changes in US monetary policy, strong economic growth and a reduction in the rate of inflation has been achieved during the peg’s lifetime.

Hong Kong has unique characteristics including substantial assets with which to defend the peg, but in an age where dogmatic adherence to the idea that floating exchange rates are ultimately the best idea, countries with their act together (i.e. NOT New Zealand) are capable of choosing different tools to maintain exchange rate stability and reduce risk for importers and exporters alike.

Because the fundamentals of Hong Kong are strong, any revaluation of the Hong Kong dollar will see substantial increases in purchasing power for Hong Kong residents and firms with assets denominated in Hong Kong dollars.