Wheeler Says RBNZ Could Intervene, Warns on ‘One-Way’ Bets

New Zealand central bank Governor Graeme Wheeler said the monetary authority is prepared to step in to damp the nation’s currency. The so-called kiwi tumbled.

“When the New Zealand dollar is coming under upward pressure, we want investors to know that the kiwi is not a one-way bet,” Wheeler said in a speech to manufacturers and exporters in Auckland. “The Reserve Bank is prepared to intervene to influence the kiwi. But given the strength of recent capital flows, we can only attempt to smooth the peaks.”

New Zealand’s dollar has gained 1.5 percent this year following a 6.6 percent rise in 2012, curbing the value of exports which make up 30 percent of the nation’s gross domestic product. Along with the Australian, Canadian, Swedish and other currencies, the kiwi has strengthened as nations such as the U.S., Japan and the U.K. reduce interest rates to near-zero and undertake quantitative easing to boost their economies.

Wheeler, a World Bank official for 13 years before joining the RBNZ in September, acknowledged the limitations of intervention and signaled a Swiss-style cap wouldn’t be wise for the kiwi. Finance Minister Bill English cautioned last week that New Zealand wouldn’t join the so-called currency wars because it’s only armed with a “peashooter.”

The local currency weakened after Wheeler’s remarks, trading at 84.05 U.S. cents at 4:25 p.m. in Wellington, from around 84.60 cents before notes of his speech were released.

Softer Tone

“Clearly he softened his tone not just for today’s audience but for the broader public given the New Zealand dollar was nudging” 85 U.S. cents, Annette Beacher, head of Asia-Pacific research for TD Securities Inc. in Singapore, said in an e-mailed note. “Will he intervene in the currency? No. Will he cut the official cash rate? No.”

Wheeler reiterated the central bank’s long-standing criteria for intervention in foreign-exchange markets: “whether the exchange rate is at an exceptional level, whether its level is justified, whether intervention would be consistent with monetary policy, and whether market conditions exist to successfully achieve the desired exchange rate adjustment.”

Japan’s currency has fallen 13 percent in the past three months as the government takes steps to stimulate its economy and beat deflation. Central banks from London, Washington and Tokyo have kept interest rates near zero in a bid to reflate asset prices and restore borrowing after the 2008 credit crunch.

Higher Yields

“These policies are aimed at stimulating growth but also have significant spillover effects,” Wheeler said. Many other nations are similarly affected as investors seek higher yields in economies with stronger growth rates and favorable commodity price outlooks, he said.

Finance ministers and central bankers from the Group of 20 nations pledged not “to target our exchange rates for competitive purposes,” according to a statement issued after a meeting in Moscow that concluded Feb. 17.

The G-20 meeting didn’t censure Japan because its policy wasn’t to intentionally devalue, Brazilian Finance Minister Guido Mantega told reporters after the meeting. Yesterday, South Korea denied that the G-20 endorsed Japan’s quantitative easing.

New Zealand’s government is wary of intervening to weaken the currency, Finance Minister Bill English indicated last week.

“We’re not willing to take the kind of huge risks involved in large scale speculation in the exchange rate with taxpayer dollars,’ English told reporters on Feb. 13. ‘‘To influence the exchange rate you need a couple of hundred billion U.S. in the bank so they take you seriously. We’d be out in the war zone with a peashooter.”

N.Z.’s Reserves

New Zealand’s foreign reserves were NZ$21.4 billion ($18 billion) as at Dec. 31, according to government figures. The U.S. international reserve position at Feb. 8 was $150.9 billion, according to Treasury data.

Wheeler today indicated that any intervention would occur in a foreign-exchange market where as much as $5 trillion a day is transacted, and the nation’s currency is about the 10th-most traded worldwide. The country’s official cash rate has been held at a record-low 2.5 percent since March 2011.

Part of the New Zealand dollar’s strength is a result of the ratio of export prices to import prices, Wheeler said. Putting that aside, the “currency is overvalued in terms of economic fundamentals and the Reserve Bank would like to see a lower exchange rate,” he said.

Job Losses

Some manufacturers have closed New Zealand plants and fired workers, citing declining demand and high costs, including the currency. Invacare Corp., an Ohio-based medical equipment maker, announced in November it is closing a New Zealand plant, firing 60 workers. Norske Skogindustrier ASA, Europe’s third-largest maker of publication paper, is cutting 110 jobs at a plant in the central North Island after scaling back operations.

Wheeler reiterated his view that quantitative easing isn’t justified in New Zealand because the country didn’t suffer the same extent of “economic damage” as the U.S. and some European countries. Adopting the Swiss National Bank policy of capping the currency would be a risky strategy, he said.

“There are no simple solutions available to the Reserve Bank of the exchange rate challenges we face,” he said. “We will use the cash rate as circumstances require and we’re exploring the scope to use macroprudential instruments.”

Further efforts to improve the level of labor productivity, reduce the fiscal deficit and to bolster savings “have to be a major part of the solution,” he said.

(Updates with governor comment in eighth paragraph)
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