It would be great to be able to tell drought-affected sheep and beef farmers in particular that a large decline in the NZD is just around the corner. But that probably won’t happen until very late this year.

First, the NZD is a high yielding currency and although the willingness of offshore investors to take the volatility our high rates implies will fluctuate tremendously at times, the gap between returns here and those overseas is quite large.

A Japanese housewife for instance can get 0.21% at her local postbank or 8.5% in a Kiwi dollar-denominated security.

A US investor can get a short dated security yielding around 2.5% in the US or a rate here 6% higher.

With interest rates likely to be cut further in the US and rate cuts also likely in the UK, our yield advantage is likely to get wider before eventually shrinking late this year.

Our currency is also well supported by high export commodity prices underpinned by continuing strong growth in China – a country with about 25% of the world’s population but only 7% of its arable land.

Rising incomes in China means a consumption shift from carbohydrates to protein and that means higher dairy and meat consumption.

That means we expect sheep and beef farmers will eventually feel the positive effects of the Chinese demand with help from grain prices rising further due to high oil prices and the switch to bio fuel production.

There will be big fluctuations but we expect continuing generally good support for the NZD from commodity prices in coming years.

With regard to the willingness of investors to purchase our high yielding currency one must note that a decline in this willingness – described as a fall in risk tolerance – is the only reason the NZD fell to US 69 cents last September from 81 cents in July.

The recent rise to over 82 cents was driven by some recovery in risk tolerance along with a widening interest rate differential in our favour.

What should worry farmers is this. We remain near 80 cents (though goodness knows where exactly the rate will be when you read this) in an environment of weak sharemarkets, worries about US recession, worries about the effects of rising food and energy prices, and therefore still relatively low risk tolerance.

What will happen if risk tolerance recovers before we get downward pressure on the NZD from easing NZ monetary policy? Our currency will rise toward 85 cents.

The story for 2008 then is one of three battling forces. Strong commodity prices we expect will stick around. An approaching easing of NZ monetary policy probably late this year.

And an eventual recovery in risk tolerance perhaps assisted by further stimulatory interest rate cuts in the US and their large fiscal stimulus package. It’s going to be a rocky ride before some sustained currency relief arrives for NZ exporters.