Wheeler Warns Kiwi Strength May Raise Odds for N.Z. Intervention

New Zealand’s central bank gave notice that continued currency strength in the face of weakening prices for the country’s exports would raise the chances of intervention, prompting a decline in the kiwi.

“It would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars” if the kiwi fails to respond to worsening fundamentals, Governor Graeme Wheeler said in a speech in Hamilton today. If the exchange rate remains strong and slows tradables inflation, it “will be a factor in our assessment of the extent and speed with which the Official Cash Rate needs to be raised,” he said.

The government last year questioned the effectiveness of intervention, likening it to being in a “war zone with a peashooter.” Underscoring the pressure for higher borrowing costs, employers hired workers at a faster pace than analysts forecast in the first quarter, data today showed. The local dollar dropped as Wheeler’s comments raised doubts over future interest-rate moves after the RBNZ’s two increases this year.

“Sustained New Zealand dollar strength will slow the tightening cycle this year,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “We still expect a June increase, but beyond June continued currency strength would reinforce our view that the RBNZ will pause until the end of the year.”

The kiwi dropped to 86.72 U.S. cents as of 12:04 p.m. in New York. It touched 87.80 yesterday, the strongest since August 2011, when it reached a post-float record.

“The Reserve Bank considers that the exchange rate is overvalued and does not believe its current level is sustainable,” Wheeler said.

Employment Growth

Employment increased 0.9 percent, or by 22,000 jobs, from the fourth quarter, Statistics New Zealand said in a report today in Wellington. The median forecast in a Bloomberg News survey of 10 economists was for a 0.6 percent gain. The jobless rate was unchanged at 6 percent as labor force participation rose to a record. Economists expected 5.8 percent unemployment.

Employment rose by 84,000, or 3.7 percent, from the year-earlier quarter, the most since the series began in 1986, the report showed. Economists forecast 3.4 percent. Growth was led by construction, retail and hospitality workers.

The RBNZ in March forecast employment would rise 3.5 percent in the first quarter from the year earlier. It projected the jobless rate would drop to 5.6 percent, declining to 5 percent by the end of 2014.

More Participation

The jobless rate was higher than expectations as the labor force participation rate rose to a record 69.3 percent from 68.9 percent in the fourth quarter. Economists forecast no change. More people were seeking work and successfully finding jobs, the statistics office said.

Ordinary time wages for non-government workers rose 0.3 percent from the fourth quarter, according to the Labour Cost Index also published by the statistics agency today. Economists expected a 0.5 percent increase.

The RBNZ was the first central bank from a developed nation to start raising interest rates this year. It has lifted its benchmark rate to 3 percent from a record-low 2.5 percent, and indicated it may rise as high as 3.75 percent this year. That’s helped to buoy the kiwi, which in turn is damping inflation.

Wheeler said the exchange rate could be expected to weaken if one or more of the following occurs: the U.S. economy continues to improve; global dairy prices continue to drop; China’s growth slows; financial market volatility begins to rise; or there is a global ‘risk off’ event such as a correction in global equity prices.

Dairy Retreat

Speaking at a dairy conference in the central North Island city today, he said dairy prices can be expected to continue to retreat over the next two to three years.

“Dairy farmers should be conscious that high dairy prices can turn around quickly,” Wheeler said.

Whole milk powder prices fell for a sixth straight auction overnight, GlobalDairyTrade results showed, with a powder price index extending its decline since Feb. 5 to 22 percent.

Fonterra Cooperative Corp., New Zealand’s biggest company and the world’s biggest dairy exporter, may be forced to lower its forecast payout to farmers for the current season from a record NZ$8.65 per kilogram of milk solids, ANZ Bank economists said.

There is “downward pressure” on the forecast, which will be reviewed at the end of the month, Fonterra Chairman John Wilson told the conference.

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