Kiwi Intervention Bets Trigger First-to-Worst Flip: Currencies

New Zealand’s peashooter is looking more like a bazooka.

After the nation’s finance minister lamented in 2013 that the challenge New Zealand faced in influencing the price of its currency was like being in a “war zone with a peashooter,” the kiwi is the worst performer in the Group of 10 since July 24, when the central bank last met, amid speculation it has intervened. That followed a first half that saw it beat its developed-nation peers.

Traders are heeding Reserve Bank of New Zealand Governor Graeme Wheeler’s resolve to weaken the local dollar after he said in July its strength was “unjustified” and risked hurting the economy. He also put further interest-rate increases on hold after he became in March the first major central banker to lift borrowing costs in at least three years.

“The market understands that the Reserve Bank has signaled a pause in interest-rate hikes and it’s now in a position where it’s ready to intervene in the currency,” Sean Keane, an Auckland-based analyst at Triple T Consulting and the former head of Asia-Pacific rates trading at Credit Suisse Group AG, said by phone yesterday.

Speculation that officials intervened intensified as the kiwi dropped 0.7 percent in under six minutes on Aug. 25. Unlike last year, officials haven’t confirmed this time that they sought to weaken the currency. Spokesman Angus Barclay said the central bank doesn’t comment on market speculation.

Negative Sentiment

“Even before the alleged intervention, the sentiment around the New Zealand dollar was quite negative,” Raiko Shareef, a Wellington-based currency strategist at Bank of New Zealand Ltd., said by e-mail Aug. 29. “It’s certainly more opportune to lean against the currency now than it was a couple of months ago.”

New Zealand’s dollar touched a six-month low of 83.11 U.S cents on Aug. 26, after coming within 0.1 cent in July of surpassing the record high of 88.43. It slid as low as 83.09 today and was at 83.11 at 1:10 p.m. in New York. Named for the flightless bird on the NZ$1 coin, the kiwi fell 1.6 percent in August and 3 percent in July, the biggest back-to-back monthly losses in more than a year.

Since taking office in 2012, Wheeler has made clear his discomfort with the appreciation of the local dollar, the biggest gainer over the past five years among the G-10. It’s still the most overvalued among those peers, according to a purchasing-power parity measure that takes into account consumer-price inflation.

‘Unjustified’ Strength

Its strength is “unjustified and unsustainable,” Wheeler said in a statement following the bank’s July 24 meeting, invoking one of the bank’s criteria for intervention.

Bank of New Zealand, a subsidiary of National Australia Bank Ltd., sees the kiwi falling to 80 U.S. cents by year-end and to 73 in 2015, according to Shareef. The median estimate of strategists surveyed by Bloomberg predicts it will end the year little changed at 84 cents. They see it declining to 82 by mid-2015, down from June’s projection of 86.

The RBNZ raised borrowing costs four times this year, to 3.5 percent from a record-low 2.5 percent, to prevent a real-estate bubble, making its currency more attractive to investors.

While traders have pared expectations for further increases since Wheeler signaled a change in policy in July, they still see the bank raising the benchmark by 0.34 percentage point in the next year, a Credit Suisse Group AG index shows. Borrowing costs are near zero in the U.S., euro region and Japan.

Economy Falters

“In the context of demand for high-yield currencies in other parts of the world, the New Zealand dollar stacks up as one of the best still,” Greg Gibbs, the head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore, said by instant message on Aug. 29.

Part of the kiwi’s recent decline was “give back” from earlier gains, he said, predicting it will end the year at 84 cents and fall to 78.30 by mid-2015.

A faltering economy and political uncertainty heading into a Sept. 20 general election are also weighing on the kiwi.

Whole milk powder prices have slumped 44 percent from a peak in February and the country’s trade balance slipped into deficit in July for the first time in nine months. Australia & New Zealand Banking Group Ltd.’s business-confidence index for August dropped to the lowest level since December 2012. The lender, which sees the kiwi falling to 81 cents by year-end, called the result a “reality check.”

Election Uncertainty

Polling shows a group backed by millionaire entrepreneur and convicted fraudster, Kim Dotcom, could win as many as five seats at the election -- a decisive bloc whose support the main opposition Labour Party would probably need to oust incumbent Prime Minister John Key and form a government. His National Party faces an additional hurdle after Justice Minister Judith Collins resigned following allegations of misconduct.

Hedge funds trimmed bullish bets on New Zealand’s dollar to a net 11,841 contracts in the week ending Aug. 26, the least since July 1, according to the Commodity Futures Trading Commission in Washington.

The kiwi’s declines saw it replaced by Australia’s dollar as the best G-10 performer of 2014. Glenn Stevens, Wheeler’s counterpart across the Tasman Sea, told lawmakers last month that the case for Australia to intervene in currency markets isn’t convincing on a risk-reward basis.

“The risk of action is more imminent from the RBNZ given they’ve put the market on notice by describing the New Zealand dollar as ‘unjustified,’” Sam Tuck, a senior currency strategist at ANZ in Auckland, said on Aug. 29. “People are less likely to bottom-feed, or pick levels to buy kiwi, just for the fear that there’s someone bigger than them out there.”

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