WELLINGTON: New Zealand's central bank chief on Thursday renewed his warning that the local dollar was at unjustifiable and unsustainable levels, fuelling speculation that it likely intervened in the currency market last month, and could do so again.
The tough talk by the Reserve Bank of New Zealand Governor Graeme Wheeler sent the New Zealand dollar tumbling to a one-year low as traders bailed out of the currency, which has been hit hard in recent months by a slide in dairy prices.
"The Bank's analysis indicates that the real exchange rate is well above its sustainable level, and also above levels justified by short-term business cycle factors," he said in a statement that caught markets off-guard.
Wheeler said the currency's fall in recent months didn't adequately reflect the sharp decline in prices of dairy products, a key export earner for the agriculture-based economy.
The statement comes days before the central bank releases figures on its currency reserves for August, when a big drop in the kiwi during illiquid trading triggered rumours that the RBNZ may have entered the market to sell the currency.
BNZ currency strategist Raiko Shareef said Wheeler's comment indicated the central bank likely sold New Zealand dollars last month, and is willing to intereven again to cap the Kiwi.
"In our recent note, we said that we would not be surprised to see some modest selling in those numbers (August reserves), perhaps something in the region of NZ$250 million," Shareef said in a note.
"Today's statement strongly suggests that the RBNZ is willing and able to do much more."
Wheeler's comments knocked the New Zealand dollar, the tenth most traded currency globally, by more than half a cent to $0.7962, its weakest since September 2013. The central bank chief did not directly touch on whether the RBNZ had been intervening in currency markets to lower the kiwi's value, but suggested that some conditions for such action have been met.
"Unjustified and unsustainable are important considerations in assessing whether exchange rate intervention is feasible. Another consideration is whether conditions in the foreign exchange markets are conducive to intervention having an impact on the exchange rate," he said.
Wheeler argued that ongoing currency strength was unsustainable even as the "kiwi" dollar has fallen 9 percent from a three-year high of $0.8839 in July, due to a pause in the RBNZ's tightening policy, and expectation that the US Federal Reserve will raise rates at some point next year.
On a trade-weighted basis, the RBNZ's preferred gauge, the currency has fallen 3.5 percent after soaring to a post-float high of 82.03 in July.
The decline in commodity prices has weighed on the kiwi, though the currency's fall has lagged a near 45 percent drop in dairy prices this year.
On Wednesday, New Zealand co-operative Fonterra, the world's largest milk exporter, slashed its farmgate payout forecast to a six-year low as dairy prices continued to slide, sparking renewed selling in the kiwi.
INTERVENTION SPECULATION
The kiwi dollar had been buoyed in recent years because of higher commodity prices, the strength of the economy and rising interest rates. Unconventional monetary policies pursued by the likes of the Bank of Japan and the Fed have also seen a surge of investor demand for New Zealand dollar's high yield.
But a turn in Fed policy, coming on top of the dairy downturn, has seen a change of fortunes for the kiwi.
As the RBNZ this month put the brakes on its interest rate-tightening campaign after raising rates by 100 basis points since March, ANZ currency strategist Sam Tuck said the central bank's increasing focus on the currency in past months marked a "change in tactic".
"They're not worried about rates at the moment as they're in a period of assessment, but they are quite worried about the level of the currency, and they think it needs to be lower," he said.
A foray into the market last month would be the RBNZ's first significant currency selling since April last year, when it sought to temper the rapid rise in the kiwi.
Before that, it conducted full-blown selling in mid-2007 in an unsuccessful attempt to fight a rise in the currency, and the RBNZ has long acknowledged that it has limited resources to counter movements in the New Zealand dollar, which sees around $100 billion in daily turnover.
That dwarfs the central bank's intervention war-chest of around $7 billion, according to RBNZ data.
The latest efforts to weaken the kiwi have come just as the currency has entered a downward trend, enabling the RBNZ to accelerate its move lower, rather than limiting its rise.
"The trend is your friend," said Tuck at ANZ. "This could be a sign that Governor Wheeler is much more in tune with the market and is working with the trend Continued uncertainty about (whether the RBNZ has entered the market) will work for the RBNZ instead of against them."
Comments
Comments are closed.