Wheeler Sold Kiwi to Weaken World’s Best-Performing Currency
The New Zealand dollar plunged after Reserve Bank Governor Graeme Wheeler said the central bank sold the kiwi and can do so again to protect economic growth.
“There has been some intervention,” Wheeler told parliament’s finance and expenditure select committee in Wellington today, driving the New Zealand currency down as much as 1.1 percent to 83.60 U.S. cents, the lowest level since April 1. The central bank last confirmed a currency intervention in June 2007, when it sold New Zealand dollars.
“The kiwi has been the flavor of the month and Governor Wheeler would like the market to choose a new flavor,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. (WBC) in Sydney. “There have been a lot of people that have been caught very long kiwi.” A long position is a bet a currency will rise in value.
Policy makers from Zurich to Tel Aviv and Tokyo have sought to limit currency gains even as the Group of 20 last month affirmed pledges to avoid deliberately weakening exchange rates. Wheeler’s action contrasts with Australian counterpart Glenn Stevens, who has said he’d need to be convinced the Aussie dollar is “seriously overvalued” before intervening to weaken it and is using interest rate reductions instead.
The RBNZ publishes monthly figures for its net currency sales that may or may not involve direct intervention, which show it sold NZ$2 million ($1.7 million) in March, and NZ$199 million in December. It had an intervention capacity of NZ$8.7 billion at March 31, the data shows.
The so-called kiwi dollar surged 4.2 percent this year against developed-market peers, the strongest gain among the 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. Wheeler is resorting to currency intervention and lending restrictions to steer the economy as surging house prices rule out interest rate cuts and the kiwi’s strength bars rate increases.
The currency bought 84.02 cents at 5:39 p.m. in Wellington.
The central bank is “on-the-record that it is prepared to intervene in the exchange rate,” Wheeler said. The currency, which he described earlier today as significantly overvalued, needs to be lower to boost exports, which make up 30 percent of the economy, he said.
“We’ve also indicated that we would not expect, given the strength of the flows, that intervention would materially change the level of the exchange, but we could take potentially the tops off rallies,” he said. “In terms of activity, there has been some intervention.”
In February, he had said investors should be aware the local dollar isn’t a “one-way bet.”
“Governor Wheeler has been concerned for a while about the strong kiwi dollar so this is part of his jawboning to drive the currency lower,” said Alvin Pontoh, a Singapore-based Asia-Pacific strategist at TD Securities Inc. “It’s a bit of a surprise that he said he can intervene to drive the currency lower. That’s been a shock for the kiwi.”
The Reserve Bank of Australia yesterday reduced the overnight cash-rate target by a quarter percentage point to a record low 2.75 percent, with Governor Stevens saying in a statement that the Aussie’s record strength “is unusual given the decline in export prices and interest rates.”
The kiwi and Australian dollar have each surged 45 percent against the U.S. dollar since the end of 2008, the biggest advances among over 150 currencies tracked by Bloomberg. New Zealand’s dollar rose to a record last month on a trade-weighted basis as the Bank of Japan joined counterparts from the U.K. and U.S. by pumping money into the financial system.
“The relative strength of the New Zealand economy, in a period where the global outlook is quite uncertain, has pushed the New Zealand dollar to new highs that will be problematic for some firms that compete in international markets,” the RBNZ said in its Financial Stability Report released in Wellington today.
In that report, Wheeler said rising property prices point to increasing risks to financial stability, and he announced tighter lending rules. From Sept. 30, the nation’s four biggest banks must increase the levels of capital they hold to cover high loan-to-value ratio lending where 80 percent or more of the purchase price is borrowed, the Reserve Bank said.
“This will strengthen the capacity of the banking system to weather a housing downturn and should also lead the banks to review the riskiness of the loans they are currently writing,” Wheeler said in the report.
House prices rose 6.5 percent in March from a year earlier, the fastest annual pace since 2008, according to Quotable Value New Zealand, a government-owned property researcher. Further gains will worsen the potential damage that could result from a housing downturn, Wheeler said.
Wheeler later told the parliamentary committee that were the risk from the housing market taken away, and the exchange rate continued to appreciate, then he would be able to consider interest rate cuts.
“If these measures succeed in restraining the housing market, then they could end up cutting interest rates,” said Greg Gibbs, a Singapore-based senior currency strategist at Royal Bank of Scotland Group Plc. “They don’t want the credit-fueled recovery being forced on them by unprecedented monetary easing from global central banks.”
Wheeler last month said he expected to keep the official cash rate unchanged at 2.5 percent through the end of the year, citing benign inflation, the impact of a summer drought and the strong New Zealand dollar.
New Zealand’s exchange rate is overvalued by about 15 percent and attempts to lower it through intervention would be futile against rising demand from global investors, the International Monetary Fund said in March.
The intervention “will become evident at the end of the month” when the central bank publishes balance sheet figures, deputy Governor Grant Spencer told the parliamentary committee today. “So we didn’t want to be more specific on it, but we acknowledge there has been some.”
Finance Minister Bill English cautioned in February that New Zealand wouldn’t join the so-called currency wars because it’s only armed with a “peashooter.”
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