Raids by New Zealand's central bank on currency markets have failed to stop the high-flying kiwi dollar from hitting fresh 22-year highs and left it with a dilemma - when to strike again for maximum impact at minimal cost.
On each of the past two Mondays - when offshore markets were closed and trading volumes thin - the Reserve Bank of New Zealand stepped in to cap the rise in the kiwi dollar, which has rallied to its highest levels since it was floated in 1985.
"You'd have to be a little bit more wary on a Monday for the next few weeks because that is the time when intervention is most likely to have impact," said Anthony Byett, managing director at a forex advisory firm fxmatters.co.nz. But keeping to such timing would be predictable, undermining the effectiveness of the intervention.
"As we've seen this Monday, interbank dealers will be more prepared now," he said. The New Zealand dollar plunged nearly 2 percent after the central bank intervened on June 11, the first time it had done so since the New Zealand dollar was released from a fixed-rate policy to trade freely on international markets.
But the second intervention had a limited and short-lived impact. The RBNZ, which has said it was concerned the high exchange rate could damage the export sector, confirmed its first intervention, but not the second.
A central bank interest rate of 8 percent - the highest in the industrial world - has made the New Zealand dollar a major investment target. Many investors fund their purchases of New Zealand assets by borrowing in a low-yielding currency, such as the yen. Central bank rates in Japan are just 0.5 percent. The kiwi rose as far as $0.7660 on Thursday, a fresh post-float peak and an all-time high on a trade-weighted basis.
While the intervention has made some investors more cautious about buying the currency, some analysts think the central bank cannot fight the trend of global demand for higher-yielding currencies.
"I think they misread what the psychology was even before the intervention," said Westpac Bank currency strategist Michael Gordon. Investors have remained wary but not put off by reports several times last week that the central bank was inquiring about prices in the foreign exchange market.
Masaaki Saito, assistant vice president of Gaitame.com, Japan's biggest currency margin-trading broker, said retail investors believe New Zealand's attractive yield difference outweighs the risk of central bank intervention.
"Japan's interest rate is only 0.5 percent while New Zealand is at 8 percent. In the end, it's that yield difference that individual investors are attracted to," he said.
Reflecting global demand for yield, the New Zealand dollar is not the only high-flying currency. In recent months, the British pound has scaled a 26-year high, the Canadian dollar a 30-year peak, and the Australian dollar an 18-year high.
Both RBNZ Governor Alan Bollard and Bank of Canada Governor David Dodge have said the strength in their currencies can not be explained by domestic economic fundamentals. So far, the Reserve Bank of Australia (RBA) has been far more relaxed about its currency, in part because its strength helps keep down import prices and so restrains inflationary pressures.
The RBA has also been more subtle in its currency operations, quietly selling the Australian dollars it bought between 1997 and 2001 when it was openly intervening to support the currency. The selling has been routine since 2002 but was stepped up in the first four months of the year to reach over A$1 billion. Dealers suspect more has been offloaded since then.
The central bank tends to play down this selling as an effort to rebuild reserves, but really it is intervention by any other name, analysts say. By keeping it quiet, the RBA avoids becoming a target for speculators while retaining the ability to inject some two-way risk into the market. Byett said the Australian central bank may also step up its presence in the currency market.