The New Zealand dollar fell sharply after the country’s central bank governor threatened intervention in the currency markets and warned investors that trading the dollar was “not a one-way bet”.
Graeme Wheeler, governor of the Reserve Bank of New Zealand, said the so-called Kiwi was now “significantly overvalued” due to recent heavy inflows of capital from foreign investors and that the central bank was prepared to intervene to influence the value of the currency.
“When the New Zealand dollar is coming under upward pressure, we want investors to know that the Kiwi is not a one way bet,” he said in a speech to the New Zealand Manufacturers and Exporters Association.
The governor warned that the currency was coming under pressure as a result of large-scale monetary easing programmes by other nations that have led to a weakening in their currencies and a “dash for yield” by global investors, singling out in particular the US Federal Reserve’s quantitative easing programme.
The New Zealand dollar has the second highest interest rates of any developed G10 nation at 2.5 per cent, making it an attractive destination for bond investors.
“The causes of the overvaluation partly lie in the spillover effects of policies in countries most severely hit by the global financial crisis. The Bank will intervene when circumstances are right,” Mr Wheeler said.
The New Zealand dollar fell 0.9 per cent against the US currency to $0.8393 while the Australian dollar rose 0.9 per cent against the Kiwi to NZD$1.2336.
Selling the Australian dollar against the Kiwi dollar has been a popular trade in foreign exchange markets recently as the Reserve Bank of Australia has appeared more likely to cut interest rates. The Kiwi is trading at its strongest level against its neighbouring currency in more than two years. Citigroup reported hedge funds reversing those trades after Mr Wheeler’s speech.
The type of intervention that New Zealand might take remained unclear. Mr Wheeler warned that setting a cap for the value of the dollar along similar lines to Switzerland’s action on the franc would be “highly inflationary”.
New Zealand also appeared to give a nod to a recent agreement between the G20 nations that countries would refrain from targeting their exchange rate, commenting that the central bank could only hope to “smooth the peaks” and could not target a specific level of its currency.
Some analysts said the caution by the central bank over how far any forex intervention could affect its currency should be seen as a reason to buy the New Zealand dollar rather than sell it.
“In essence the market is misinterpreting the RBNZ’s declaration of surrender in the currency wars as a rallying cry. This should provide an opportunity to buy the New Zealand dollar on the dip,” wrote Todd Elmer, analyst at Citi, in a note to clients.
