By international standards NZ is a very small economy. Yet the NZ dollar is the 10th most traded currency in the world. This is because the NZ$ is trusted as it is backed by a country with little corruption, a strong rule of law, and relatively low dept levels.
However NZ has a dilemma. Widely held economic theory shows that a country can’t have all 3 of the following:
—- A fixed foreign exchange rate
—- Free capital movement
—- Independent monetary policy
If you want two of these, you need to give up on the third.
For example to fix its currency to the US dollar, Hong Kong basically gave up independent monetary policy and instead embraced America’s monetary policy. It will be interesting to see if this changes with the new controls China is imposing on Hong Kong!
For most developed economies a desire to have both free capital movement and to control their own monetary policies has led to floating exchange rates.
For large economies the majority of commerce occurs inside their borders so it is better to let foreign exchange ( forex) rates float, and have more control over monetary policy in other ways. NZ has tried to operate this way but it has resulted in wide movements in exchange rates which can harm our exporters.
Some stability has been achieved by manipulating interest rates. A lower local interest rate causes our currency to weaken thereby making exporters more viable in the international economy on which NZ depends.
However as we approach near 0% interest rates and unlikely to break materially from these levels, the government can no longer use this tool to manage forex rates. This will lead to more forex volatility.
As per the above dilemma it is assumed NZ will want to maintain an independent monetary policy. If it then fixes the foreign exchange rate ( as floating it at 0% interest has no effect) we will need to place controls over the flow of capital. We are already seeing this start with the requirement to report money flows. However the disguise is that this is for anti money laundering.
At THE BROKERS we believe the above considerations should be taken into account when investing and that if you are a serious investor you should diversify your investments into several countries to spread your country and exchange rate risks. Working with THE BROKERS we can show you the options available and even how this can greatly enhance your plan to achieve Intergenerational Family Wealth.
