Wheeler’s Intervention Fortuitous in Kiwi Divergence: Currencies

Reserve Bank of New Zealand Governor Graeme Wheeler is learning the value of good timing.

He’s turned the local dollar from the best-performing developed-nation currency of the first half into the biggest loser by expending a few hundred words talking down an exchange rate he said was too high and selling a net NZ$521 million ($410 million) in global markets. His masterstroke, strategists say, was to intervene as sentiment toward the U.S. dollar surges.

“This is a good time for the Reserve Bank to be selling the currency and being able to get some kind of impact,” Hamish Pepper, a foreign-exchange strategist at Barclays Plc in Singapore, said by phone on Oct. 1. “It’s come at a time when the U.S. dollar seems to have really gained some momentum.”

Policy makers have been warning for months that the local dollar’s strength is unsustainable and hurting the economy, which grew in the second quarter at the slowest pace in a year.

New Zealand’s central bank announced on Sept. 29 that it sold currency in August in its biggest intervention in seven years. The so-called kiwi tumbled to a 13-month low of 77.09 U.S. cents from this year’s high of 88.36 on July 10.

Policy Vindication

The currency’s recent losses vindicate intervening in markets, a policy that Finance Minister Bill English likened in May to being in a “war zone with a peashooter.” New Zealand’s currency reserves amount to about $16.6 billion, compared with $1.21 trillion in Japan, according to the International Monetary Fund.

Even now, the local dollar remains above the 65-cent level that Prime Minister John Key described this week as the ideal “Goldilocks rate.” The kiwi hasn’t been at that level since July 2009.

A drop to 65 cents “would be very difficult to achieve,” Jonathan Cavenagh, a strategist in Singapore at Westpac Banking Corp., said by phone on Oct. 1. Westpac sees a gain to 81 cents by year-end, according to Cavenagh, who said there are “downside risks” to that view.

The kiwi’s 11.4 percent drop since June erased a 6.6 percent first-half gain that trailed only the Brazilian real’s 6.7 percent surge among the 31 major currencies tracked by Bloomberg. It traded at 77.70 U.S. cents as of 1:26 p.m. in New York, 5.4 percent weaker on the year. The currency hasn’t fallen more than 1 percent in any year since 2008, when it dropped 24 percent amid the global financial crisis.

Kiwi Outlook

The Reserve Bank of New Zealand intervened in the foreign-exchange market after the kiwi climbed in July to within 0.1 cent of the all-time high reached in 2011. Investors were attracted to the nation’s financial assets because of its 3.5 percent benchmark interest rate, the highest among major developed economies.

Barclays sees the currency little changed at 78 cents in three months and sliding to 76 in six months, Pepper said. The median estimate strategists surveyed by Bloomberg is for a gain to 81 by Dec. 31, before a drop to 80 by mid-2015.

Goldman Sachs Group Inc. said in a report today that the kiwi remains expensive and may weaken to 63 cent over ‘the longer run’ on the back of decline in terms of trade, slow relative productivity growth and protracted U.S. cyclical outperformance. In the “short-to-medium” term, the currency may depreciate 4 percent versus the greenback, strategists led by London-based Alexandre Kohlhas, wrote in the report.

Diverging Paths

Options traders are the most bearish on the kiwi’s outlook among the Group of 10 developed-nation currencies. The difference between the price of three-month contracts giving the right to sell the local dollar over those allowing for purchases reached a nine-month high of 2.03 percentage points on Oct. 1 on a closing basis. It was at 1.87 points today.

The U.S. dollar has risen 7.7 percent in the past three months against a basket of nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes, the most in the group. The kiwi is the biggest loser, with a 5.7 percent drop.

There’s a 52 percent likelihood the U.S. will raise its target federal funds rate from the zero-to-0.25 percent range it has maintained since 2008 to at least 0.5 percent by July 2015, futures data compiled by Bloomberg showed today.

For the RBNZ, “the timing would also seem opportune to launch an intervention campaign,” UBS AG strategists including Singapore-based Gareth Berry wrote in a Sept. 29 report. “With the U.S. dollar rallying across the board, the RBNZ is no longer fighting the current, and gets more bang for its buck.”

The central bank announced the currency sales four days after Wheeler surprised markets with an unscheduled statement titled “New Zealand’s Exchange Rate: Why the Reserve Bank believes its level is unjustified and unsustainable.”

Milk Declines

The language invoked the central bank’s criteria for intervention and echoed remarks Wheeler made following policy decisions in July and September. The RBNZ said it expects “a significant further depreciation” in the kiwi because of a decline in the price of the commodities it exports.

Policy makers are trying to kick-start an economy where growth slowed to 0.7 percent in the second quarter from the previous three-month period. The price of whole milk powder fell to a five-year low at an auction this week. Dairy products are New Zealand’s biggest exports.

The RBNZ’s Sept. 25 statement, before the announcement on currency sales, was “well-timed,” according to David Forrester, Singapore-based senior vice president for G-10 foreign-exchange strategy at Macquarie Group Ltd. The bank sees the kiwi at 78 cents by year-end.

“It reminded investors that the RBNZ still thinks that the currency is overvalued, despite it already having come a long way,” Forrester said by phone on Oct. 1.

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