July 29 (Bloomberg) -- New Zealand’s overvalued dollar is at risk of further declines after its central bank warned that the currency’s level is “unjustified,” according to UBS AG.
“There could still be a long way to go,” Geoffrey Yu, a senior currency strategist at UBS in London, wrote in a report today. The central bank’s caution on the exchange rate “sounds like an intervention warning to the market.”
The Reserve Bank of New Zealand raised the official cash rate by a quarter-percentage point to 3.5 percent at its July meeting, the fourth increase since January. New Zealand this year became the first developed country to boost borrowing costs since 2011. The kiwi, named for the image of the flightless bird on the NZ$1 coin, touched its strongest level since August 2011 on July 10.
The country’s currency adjustment hasn’t kept pace with declining export earnings, Yu said. While there’s not much the central can do about its present predicament, “an early start helps, so expect the RBNZ to keep up its language or even gently step into markets, especially when its counterparts remain dormant,” he said.
The kiwi touched 85.03 U.S. cents today, the lowest since June 10. It climbed to 88.36 on July 10, near the all-time high of 88.43 in August 2011.
The currency is 20 percent overvalued versus its U.S. peer, according to the Organization for Economic Cooperation and Development’s purchasing-power parity gauge.
“With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall,” RBNZ Governor Graeme Wheeler said last week.
New Zealand’s dollar will trade at about 85 U.S. cents at the end of year and weaken to 82 cents in mid-2015, according to the median forecast of economists surveyed by Bloomberg.
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