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Kiwi Bears Capitulate as Wheeler Surrenders to Flows: Currencies

RBNZ Governor Graeme Wheeler
Graeme Wheeler, governor of the Reserve Bank of New Zealand, said Nov. 7 that lower interest rates, the main tool for discouraging speculators, are unlikely to weaken the so-called kiwi dollar. Photographer: Mark Coote/Bloomberg

New Zealand’s dollar is crushing bears as strategists boost their forecasts and the nation’s new central-bank chief says there’s little he can do to stem the gains.

The so-called kiwi has appreciated 3.9 percent in 2012, the most among 10 developed-market currencies measured by Bloomberg Correlation-Weighted Indexes. After cutting year-end estimates by an average of 6 percent in the second quarter, analysts surveyed by Bloomberg have since raised them by 5.1 percent.

Investors are piling into the currency as the economy grows at twice the average rate for the Group of 10 nations, housing rebounds and demand rises for dairy products, which make up about 25 percent of exports. Reserve Bank of New Zealand Governor Graeme Wheeler said on Nov. 7 that lower interest rates, the main tool for discouraging speculators, are unlikely to weaken the currency.

“It’s one of the few countries that offer the best balance between safety and yields,” said Hideya Kubo, a senior money manager in Tokyo at DIAM Co., which oversees the equivalent of $129 billion.

Kubo had 9.7 percent of his 392 billion-yen ($4.83 billion) fund in New Zealand dollar-denominated assets, according to a Nov. 5 report on the company’s website.

The kiwi, nicknamed for the image of the flightless bird on its one dollar coin, has risen 4.4 percent this year against the U.S. currency. It rose 0.2 percent to 81.16 U.S. cents as of 6:12 a.m. New York time, up from this year’s low of 74.57 U.S. cents reached on May 23 and June 1. The currency advanced to 88.43 cents on Aug. 1, 2011, a record since becoming freely traded in March 1985.

Rising Currency

Analysts, who cut their year-end estimate for the kiwi to as low as 78 cents as of June 28, now see it rising to 82 cents. The increase in the forecast is second only to the 6.3 percent jump for the Swedish krona, data compiled by Bloomberg show.

“It’s hard at this point to see any factor that would lead to a major depreciation in the exchange rate in the short term,” Wheeler told parliament’s finance select committee on Nov. 7. “There’s no easy solution that says cut interest rates” 25 basis points and “the exchange rate will go down,” he said.

Wheeler, a 61-year-old former World Bank official who took over from Alan Bollard in September, kept the central bank’s target interest rate unchanged at 2.5 percent in his first policy meeting on Oct. 25, the highest among the G-10 currencies after the 3.25 percent in Australia. Those in the U.S. and Japan are about zero.

Relative Rates

Bollard kept the benchmark rate unchanged since March last year to allow the economy to recover after the nation’s deadliest earthquake in 80 years. The February 2011 temblor struck Christchurch, New Zealand’s third-largest city, and the surrounding Canterbury province, killing 185 people.

The yield on New Zealand’s 10-year note closed today at 3.41 percent, or 180 basis points more than similar-maturity U.S. Treasuries. It offered a premium of 267 basis points over its Japanese equivalent.

Higher relative yields have attracted international investors, who buy the local dollar to purchase the bonds. Foreigners owned 62.4 percent of New Zealand’s government debt as of Oct. 31, up from 60.6 in October 2010, central bank data showed yesterday.

The bonds have “supported the huge amount of inflow into the market,” said David Croy, the Wellington-based head of markets research for New Zealand at ANZ National Bank Ltd. The lender sees the currency strengthening to 85 U.S. cents by mid-2013, the highest forecast along with BNP Paribas among strategists surveyed by Bloomberg.

Gains Tempered

Government bonds with a maturity of more than a year have returned 12 percent the past 12 months in U.S. dollar terms, according to data compiled by the European Federation of Financial Analysts Societies and Bloomberg. They are the best performers among developed markets that have a AAA rating from at least one of the three main credit-assessment firms.

While the median estimate of economists surveyed by Bloomberg is for New Zealand’s gross domestic product to expand 2.55 percent this year and 2.95 percent in 2013, concern is rising that a stronger currency will temper those gains.

The nation’s terms of trade index, which measures the price of exports relative to imports, dropped 2.6 percent in the three months ended June 30, the most since June 2009, Statistics New Zealand said Sept. 3.

‘Gives Incentive’

“The collapse of the terms of trade means that New Zealand pays more when it trades more, so a stronger currency stifles the economy,” said Akira Takei, head of the international fixed-income department in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion. “It gives incentive to the nation to weaken the currency.”

Options prices are indicating an 81 percent chance the kiwi will weaken 2 percent by May. The median forecast of strategists is for it to depreciate to 80 U.S. cents by December 2013.

Data from the statistics office show overseas sales of milk powder, butter and cheese comprised one quarter of New Zealand’s exports in the 12 months through September. The 31 percent rebound in milk-powder prices since mid-July has helped strengthen the local dollar. Contracts for January delivery cost $3,335 a metric ton, according to the most recent figures from Auckland-based Fonterra Cooperative Group Ltd.

Top Producers

New Zealand is among the top five producers of whole-milk powder and will contribute almost 25 percent of global supply in the 12 months through May, according to the U.S. Department of Agriculture. Asia is expected to account for 52 percent of global consumption this year, the most in the department’s data dating back to the 1980s.

“As consumption among the Asian middle class transforms from fulfilling their needs to having enough wealth to satisfy their wants, there will be greater demand for higher-value products,” said Sean Keane, an analyst in Auckland at financial advisory group Triple T Consulting and the former head of Asia-Pacific rates trading at Credit Suisse Group AG. “New Zealand can position itself as a provider of high-quality products.”

That would help the nation to reduce its trade imbalance and borrow less money offshore, which should further bolster the local currency, Keane said.

While the central bank has cited the currency’s strength as a potential drag on the economy, Wheeler’s next policy change may be to raise borrowing costs. The median estimate of 18 economists surveyed by Bloomberg is for the benchmark rate to increase a half percentage point to 3 percent in 2013, to the highest alongside Australia’s among advanced economies.

House Prices

House prices rose at the fastest pace in five months in October, the Real Estate Institute of New Zealand said last week. Costs are rising as new listings “struggle to keep pace with buyer demand,” REINZ Chief Executive Officer Helen O’Sullivan said in a statement. The time needed to sell a house dropped to 32 days from 33 days in September and 35 days in October last year.

“We have to remember that property prices across New Zealand are accelerating,” said David Forrester, senior vice president for G-10 foreign-exchange strategy at Macquarie Bank Ltd., which sees the kiwi strengthening to 83 U.S. cents by year-end. “That may prevent RBNZ Governor Wheeler from cutting rates.”

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