Intervention Hint by Wheeler Saps Kiwi Gains: Currencies

Reserve Bank of New Zealand Governor Graeme Wheeler is upping the ante in his campaign against the local dollar’s world-beating gains.

New Zealand’s kiwi tumbled the most in 11 months yesterday after Wheeler said in his policy statement that its strength was “unjustified” and that he’ll wait before raising interest rates further. The currency is the best performer among 31 peers tracked by Bloomberg over the past five years and came this month within 0.1 U.S. cent of surpassing a record high.

Wheeler has struggled for months to square his ambition for a weaker, more export-friendly local dollar and the need for higher borrowing costs to prevent a housing-market bubble. While he’s tried to talk down the currency in the past, strategists detect a hardening in his tone that may be the prelude to currency market intervention to curb the kiwi.

“It’s definitely a warning shot that they do have tools that they could use if they believe it’s necessary,” Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Ltd., said yesterday in a phone interview from Auckland. “The level of the currency is becoming a lot more important for the RBNZ.”

Cash Rate

Wheeler’s statement followed the central bank’s policy meeting, where he lifted the official cash rate by a quarter-percentage point to 3.5 percent, the fourth increase since January. New Zealand was the first developed country to boost borrowing costs this year since 2011.

The kiwi, named for the image of the flightless bird on the NZ$1 coin, fell to a six-week low of 85.39 U.S. cents today, after climbing to 88.36 on July 10, near the all-time high of 88.43 in August 2011. It has strengthened 30 percent since July 24, 2009, and beat all major peers in the four quarters to June 30 with a 13 percent advance versus the U.S. dollar.

Now, traders speculate, the tide is turning. The odds of the New Zealand dollar surpassing its record this quarter fell to 22 percent yesterday, from 93 percent on July 10, according to Bloomberg calculations of implied-volatility prices in the options market.

ANZ expects the central bank will keep rates unchanged until next year, and forecasts the kiwi will fall about 3 percent to 83 cents by Dec. 31, from 85.51 at 11:14 a.m. in New York. That makes the bank more bearish than the median forecast in a Bloomberg strategist survey, which puts the currency at 85 cents by year-end.

Consumer Prices

The RBNZ was able to change tack on interest rates after a July 16 report showed consumer prices rose more slowly in the second quarter than economists predicted.

Annual inflation quickened to 1.6 percent, from 1.5 percent in the previous period and compared with a 1.8 percent forecast in a Bloomberg survey. Dairy prices have also fallen. Exports, which become more expensive as a currency strengthens, slumped to a five-month low in June.

“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,” Wheeler said yesterday.

Daniel Martin, an economist at Capital Economics Asia Pte in Singapore, said the RBNZ is in no rush to resume rate increases.

“The latest downturn in economic data, along with the persistent strength of the New Zealand dollar, have provided some cause for caution,” Martin said yesterday in an e-mailed note to clients. “For now, there is little urgency to hike again.”

Just Words?

Others are less confident New Zealand’s central bank will be able to depreciate its dollar effectively.

Stephen Miller of BlackRock Inc. said the kiwi has limited scope to weaken until the Federal Reserve “gives us an unambiguous signal” that it’s about to raise its own record-low interest rates. Until then, he sees the kiwi staying in a range of about 84 to 88 U.S. cents.

“Beyond signaling that, at least for a time, it’ll stop raising rates, and signaling that they think the kiwi dollar is overvalued, I’m not really sure there’s much more the RBNZ can do,” Miller, the head of Australian fixed income and cash at the world’s biggest money manager, said yesterday by phone.

As well as the change of stance on rates, the prospect of New Zealand selling its currency to weaken it is stoking speculation about a decline.

Wheeler warned in May it would become “opportune” for officials to intervene if the kiwi kept rising. In the past, one of the criteria the central bank has set for currency intervention is that the local dollar’s level is “unjustified,” the same term he used yesterday.

“The RBNZ was a lot more vocal on where they think the kiwi dollar should be going,” said Prashant Newnaha, a Singapore-based macro strategist at TD Securities Inc., which predicts a drop to 80 cents by year-end. “Inflationary pressures are still there, but they remain relatively well under control and the RBNZ is not going to be taking as hawkish a view.”

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