NEW ZEALAND: Kiwi dollar rebounds despite Central Bank intervention
Updated
New Zealand's central bank is having little impact with its efforts to stop the rise and rise of the local currency. The Reserve Bank has sold the New Zealand dollar for a second time in a week in an attempt to bring it down from near record highs against other major currencies. The Bank's intervention had only a temporary effect and after a small correction, the "Kiwi" was trading above its opening price.
Presenter: Karon Snowdon
Speakers: Cameron Bagrie, Chief Economist with the ANZ Bank in New Zealand; Danica Hampton, currency strategist at the Bank of New Zealand
SNOWDON: A week ago the New Zealand Reserve Bank took the unprecedented step of intervening in the foreign exchange market.
It sold the New Zealand dollar in an effort to bring it off two decade highs of more than 76 US cents. It was the first intervention since the New Zealand dollar was floated in 1985.
The Bank tried again today with the kiwi buying 75.45 US cents - but the sell off didn't work.
At the end of local trading the new Zealand dollar was back above its opening - and buying 75 .6 US cents.
Among other major currencies it was trading at almost 90 Australian cents and just over 93 Japanese yen.
Cameron Bagrie, Chief Economist with the ANZ Bank in Wellington, believes the Bank had little choice.
BAGRIE: The Reserve Bank has gone with neither confirm nor deny, but I certainly think where there's a little bit of smoke there's going to be a little bit of fire. And the Reserve Bank's been pretty clear in its communication. They do think the New Zealand dollar up around these sort of levels is what they call unjustifiably high. So if the Reserve Bank's got pretty deep pockets they can afford to I guess accumulate a little bit of currency here, accumulate a few US dollars and wait for the New Zealand dollar to go down because I guess it's a bit of a stretch but I think the New Zealand dollar is going to be at 75 cents two years out.
SNOWDON: That might depend on how long the appetite of investors last from low interest rate countries - particularly Japan who are looking for higher returns.
Japan's ultra low interest rate of just half of one per cent means hundreds of thousands of retail investors are doing just like the big boys.
They're borrowing money to invest in New Zealand - its got interest rates of 8 per cent, they're among the highest in the world.
It's called the carry trade. And it means that while the New Zealand dollar booms the Yen keeps getting weaker - it dropped to a record low against the Euro in Asian trade Monday.
But while the New Zealand Reserve Bank is trying to slow down its dollar rise on the one hand, on the other it's likely to raise interest rates again soon according to Danica Hampton, currency strategist at the Bank of New Zealand.
HAMPTON: On Friday with the relatively diverse comments from the BOJ and those are effectively seen as giving the green light to the carry trade. So that combined with the strong rally we've seen in the global equity market was really quite supportive for carry trade and the last ... over the weekend, we've really seen high yielding currencies, like the Kiwi and the Australian dollar outperform.
SNOWDON: Does that have any concerns there in New Zealand, the strength of the carry trade and the strength of the dollar there?
HAMPTON: I think given the large build-up of carry trade position should we see a deterioration in risk appetite or Japanese interest rates rise then definitely a potential downside risk to the Kiwi dollar. And we've seen episodes where we have seen sort of shakeouts in carry trade positions, like back in early March when we saw some sharp losses in Chinese equities. And there is the potential to see sort of a sharp decline in the Kiwi dollar in a relatively short space of time. So it is a potential downside risk.
SNOWDON: Exporters generally don't like higher currencies and New Zealand exporters have a lot of adjusting to do.
And like in Australia, commodity prices are playing their part, in New Zealand's case dairy milk products have soared in price - a massive 75 per cent in some cases this year. Cameron Bagrie:
BAGRIE: Yeah it's absolutely phenomenal and its New Zealand's biggest agricultural industry so at the moment we are literally sitting on one big cash cow and phenomenal, you know for the average sort of dairy farm you're talking about an income boost in the vicinity of 150 to 200-thousand, and that's sort of may just go straight to the bottom line. So the dairy sector in New Zealand at the moment it's just absolutely humming.
