For a central banker armed with what government officials call a peashooter, New Zealand’s Graeme Wheeler is proving to be a good shot.
Since the Reserve Bank governor said on May 8 that he was intervening in the currency market to weaken the local dollar, after it gained as much as 15 percent versus the greenback from last year’s low, it has declined about 7 percent. That’s the second-biggest drop among Group of 10 currencies after the 8.1 percent slide in Australia’s dollar. Speculators have pared bullish bets on the kiwi to the least since July as analysts cut their year-end forecasts to the lowest in four months.
The central bank has resorted to manipulating the kiwi to buoy the economy as the risks of inflation and a housing bubble prevent it from reducing interest rates, which are already at a record low. Wheeler’s talk of intervention came just as an improvement in the world’s largest economy fueled a broad rally in the U.S. dollar.
“His timing was impeccable, you’ve got to give him credit for that,” said Sam Tuck, a senior foreign-exchange manager at ANZ Bank New Zealand Ltd. in Auckland. Wheeler’s comments “reinforced the idea that the New Zealand dollar is not a one-way bet,” Tuck said.
Finance Minister Bill English said in February the South Pacific nation of 4.4 million people and a $160 billion economy can’t expect to take on the $4 trillion-a-day currency market because it has the firepower of a “peashooter” by international comparison.
Wheeler’s May 30 statement that he’s prepared to step up efforts to devalue the kiwi after selling a net NZ$256 million ($200.6 million) in April nevertheless weakened the currency, whose strength has hampered New Zealand’s economic recovery.
A May 24 government report showed that the April 12-month trade deficit was NZ$694 million, wider than the median estimate of NZ$346 million among economists surveyed by Bloomberg News.
The New Zealand dollar fell as much as 1.8 percent today to an 11-month low of 77.61 U.S. cents, and was 0.3 percent down at 78.82 U.S. cents as of 3:26 p.m. in New York. Even with the drop, it’s up from 48.95 in March 2009 and is the best performer since then among major currencies tracked by Bloomberg.
Analysts are having a hard time keeping up with the declines. They now see the kiwi at 81 U.S. cents by the end of 2013, down from 84 last month, according to median estimates compiled by Bloomberg. In a report last week, strategists at Morgan Stanley said they expect it to fall to 76 U.S. cents.
Wheeler’s commentary is “jawboning by the central bank to talk the kiwi down, and it’s a reasonably inexpensive way of influencing it,” said Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland. “You could say the RBNZ’s communication has increased since Wheeler arrived.”
Wheeler, who took the helm of the Reserve Bank of New Zealand in September, delivers his next quarterly Monetary Policy Statement on June 13. He’ll leave the official cash rate at a record low of 2.5 percent, according to all 15 economists in a Bloomberg News survey.
Unlike counterparts in the U.K., Europe, U.S. and Japan, Wheeler hasn’t been able to cut his benchmark toward zero because of concern that house-price inflation will accelerate. Prices rose 7.1 percent in May from a year earlier.
“While he lacks the ability to really influence the currency through interest rates, he’s certainly making the best use of the limited tools at his disposal,” said Nick Tuffley, the chief economist at ASB Bank Ltd. in Auckland. “He’s trying to change perceptions, and on several occasions has been able to knock the kiwi back.”
The kiwi fell 0.7 percent when Wheeler first spoke of intervention on May 8, and it weakened again when he said May 30 that he could step up selling of the currency.
Under previous Governor Alan Bollard, the RBNZ sold NZ$2.36 billion in June, July and August of 2007 in an attempt to weaken the kiwi. While it slumped on the intervention, it regained most of that by October.
Wheeler’s NZ$256 million in currency sales in April compares with the NZ$10.1 billion of average daily trading in New Zealand’s foreign-exchange market that month, according to central bank data.
“What he’s doing is not really intervention, it’s too small, but by calling it that he’s sending a powerful message,” said ANZ’s Tuck. “He’s been very smart on the communication front.”
Wheeler’s efforts to weaken the currency coincided with gains in the U.S. dollar on speculation the Federal Reserve will reduce its monetary stimulus as the economy gathers pace.
The U.S. Dollar Index has risen 3.4 percent since reaching 78.601 in September, its weakest level in the past 12 months. The kiwi fell 1.7 percent after payrolls data on June 7 showed the U.S. labor market is improving.
“I think the RBNZ’s influence has been pretty marginal,” said Darren Gibbs, the chief economist at Deutsche Bank AG in Auckland. “It’s very much a U.S. dollar move. But the kiwi might have been stronger in the absence of Wheeler’s commentary. It’s a smart game.”
Prime Minister John Key, a former head of global foreign exchange at Merrill Lynch, has expressed skepticism over central bank intervention, saying it can only assist a move already underway and can’t reverse a market direction.
He said at a press conference in Wellington yesterday he’d be surprised if the RBNZ’s recent activity had made a big difference to the kiwi’s exchange rate. “It is still overvalued,” he said. “But we’re happy with the decline.”
Futures traders have curbed bullish bets on the kiwi for five straight weeks, figures from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on a gain in New Zealand’s dollar against the greenback compared with those on a loss -- so-called net longs -- totaled 6,013 contracts on June 4, the least since July and down from a record 30,808 in mid-April.
While a firm New Zealand dollar helps the RBNZ keep inflation under control, Wheeler and the government have bemoaned its strength because of the damping effect it has on exports, which account for about 30 percent of economic output.
New Zealand is the world’s largest exporter of dairy products. Revenue from dairy shipments will grow 8.1 percent to NZ$13.9 billion in the year through June 2014 after dropping 5.5 percent in the previous 12-month period, the Ministry for Primary Industries said in its semi-annual forecasts published in Wellington yesterday.
With international forces still exerting downward pressure on the kiwi and the central bank likely to reiterate its concern this week, analysts indicated scope for further declines.
“We see the kiwi reaching 78 U.S. cents in a matter of weeks,” Westpac’s Speizer said. “That’s a pivotal level and the whole market will be watching.”