sign up log in
Want to go ad-free? Find out how, here.

Graeme Wheeler says if Kiwi dollar stays high it would be 'more opportune' for the central bank to intervene by selling NZ dollars

Currencies
Graeme Wheeler says if Kiwi dollar stays high it would be 'more opportune' for the central bank to intervene by selling NZ dollars
Reserve Bank Governor Graeme Wheeler

Reserve Bank Governor Graeme Wheeler has fired a warning shot toward the flying Kiwi dollar, by saying that if the currency stays high it would be "more opportune" for the RBNZ to intervene by selling NZ dollars.

Wheeler made the comments in a speech to the DairyNZ conference in Hamilton this morning. Before his comments the NZ dollar had soared to US87.62c, but a short time after his speech was circulated the dollar had dropped to just below US87c.

The last time the RBNZ intervened significantly in the currency markets was in April of last year, when it sold $256 million worth of currency. Before that the previous time was in early to mid 2008 when a rather more significant $1.6 billion worth was sold.

After the April 2013 intervention, which was only revealed in May 2013, the Governor said that the RBNZ was prepared to "scale up" its currency intervention if it saw opportunities to have a greater influence in the value of the Kiwi dollar. When Wheeler made those comments the Kiwi dollar was actually significantly lower than it is now.

Subsequently and till very recently the RBNZ has seemed more sanguine about the continuing high currency and has appeared intent on not letting that interfere with its plans to raise interest rates to take some steam out of the economy.

But in recent weeks the language from the RBNZ has changed markedly.

Today Wheeler reiterated some of his earlier recent remarks that the RBNZ considered the NZ dollar overvalued and that its current level was not sustainable. He then reiterated that a continued strong Kiwi currency could have an impact on the speed and extent of future interest rate rises. The RBNZ has already hiked rates twice this year with more expected to follow - subject now to what happens with the dollar.

Then Wheeler said: "Further, if the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars."

Prior to this Wheeler remarked that the exchange rate could be expected to weaken "if one or more of the following occurs":

  • the US economy continues to improve;
  • global dairy prices continue to come off their recent highs;
  • China’s growth slows;
  • financial market volatility begins to rise;
  • or there is a global ‘risk off’ event such as a correction in global equity prices.

“If the exchange rate remains strong, it is likely to be reflected in continued low or negative tradables inflation.  In such circumstances, the high exchange rate, along with new economic data, will be a factor in our assessment of the extent and speed with which the Official Cash Rate needs to be raised.”\

BNZ head of research Stephen Toplis said the RBNZ threat to intervene was "very interesting on a number of levels":

  • "It shows that the RBNZ really does believe the currency is fundamentally overvalued and can no longer hide behind the rising terms of trade because (a) the currency has risen further from the levels that the high terms of trade had previously justified and (b) the outlook for the terms of trade has deteriorated further.
  • "The Reserve Bank will only intervene if it thinks intervention would stand a chance of lowering the currency. It must feel that way and will probably have been heartened that today’s jawboning at least had some impact.
  • "The intervention has to be consistent with monetary policy. This means that you can’t be intervening to push the currency lower at the same time that you are raising interest rates. So, today’s comments are also a clear indication that the Bank is contemplating a pause in its tightening cycle while it tries to hobble the NZD."

Toplis said "for now" the BNZ economists were sticking with their published view that the RBNZ raises its cash rate in both June and July.

"But this is highly currency dependent and, the way things are going, a near term pause is looking increasingly likely."

ASB chief economist Nick Tuffley said that although the RBNZ had today "upped the rhetoric" on the high NZ dollar, any intervention "would have its challenges". 

"The RBNZ is in the midst of a tightening cycle, with a widespread expectation of another 150-200bp of [Official Cash Rate] increases yet to come.  Any attempts at intervention will be fighting the underlying interest rate story – notwithstanding the RBNZ’s observation that the interest rate cycle is fully priced in and that some analysts believe there is considerable downside risk to the NZD.

"Our view is that dairy prices are likely to find a bottom over the next few [GlobalDairyTrade] auctions and are likely to recover modestly over the second half of the year.  That would suggest that the risk of continued decline in dairy prices triggering FX intervention is reducing.

"We do expect that sustained NZD strength will slow the tightening cycle this year.  We still expect a June OCR increase, with strong migration, muted impact on 2-3 year mortgage rates of the recent OCR increases, resilience of other commodity prices as some reasons for a further near-term hike.  But, beyond June, continued NZD strength would reinforce our view that the RBNZ would pause after June until the end of the year."

This is the media release from the Reserve Bank carrying details of the speech:

New Zealand’s dairy sector has a bright future, but important challenges need to be managed to ensure it retains its dynamism, the Governor of the Reserve Bank, Graeme Wheeler, said in a speech today.

Mr Wheeler told the DairyNZ conference in Hamilton that the dairy sector makes a vital contribution to the New Zealand economy. 

“Dairy exports make up almost a third of New Zealand’s annual merchandise exports, animal numbers and prices have increased and on and off farm productivity growth has been impressive.”

Commenting on New Zealand’s high exchange rate Mr Wheeler said the strength of the terms of trade, which are at a forty year high, are an important driver. New Zealand’s long-term reliance on foreign savings to finance its investment needs also places upward pressure on interest rates and the exchange rate.  In addition, the high exchange rate also reflects the relative strength of New Zealand’s economy compared to other advanced economies.

“The Reserve Bank considers that the exchange rate is overvalued and does not believe its current level is sustainable. Our exchange rate could be expected to weaken if one or more of the following occurs: the US economy continues to improve; global dairy prices continue to come off their recent highs; China’s growth slows; financial market volatility begins to rise; or there is a global ‘risk off’ event such as a correction in global equity prices.”

“If the exchange rate remains strong, it is likely to be reflected in continued low or negative tradables inflation.  In such circumstances, the high exchange rate, along with new economic data, will be a factor in our assessment of the extent and speed with which the Official Cash Rate needs to be raised.”

“Further, if the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars.” 

Mr Wheeler said that dairy debt almost trebled over the past decade, and currently stands at $32 billion. 

“It is concentrated among a small proportion of highly leveraged farms with around half of the dairy debt being held by only 10 percent of dairy farmers”.

Despite the prosperous outlook for the dairy sector, Mr Wheeler warned that even the most dynamic enterprises can lose competitiveness and suffer losses in market share, so there are important challenges to manage.

“On the external front these include the oscillations in global dairy prices, increasing competition from other international suppliers, the risk of slower growth in China, and the need to continue diversifying our export markets, including positioning for the enormous longer term opportunities in the Indian market. On the domestic front, dairy farmers are conscious that high dairy prices can turn around quickly and will need to continue managing their cash flows and borrowings in a prudent manner.”

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

48 Comments

Mr Wheeler really does think he is a financial 'superman'.

Can't resist the urge to meddle... make it look like his job is important I guess. Have to justify the tax-payer funded salary eh.

Now he's gonna take on the international currency markets.

How big is this guy's ego?

Up
0

Indeed. Correct me if I'm wrong but hasn't the message consistently been that it is pointless to try to intervene with the currency?  What has changed?

Up
0

Aren't most of the great failures in currency market intervention has been when governments try to strengthen their currency?  They need foreign reserves to sell and it's easy to run out of them.

Weakening the currency, well that seems to be a whole different game.  In theory a govt can just keep printing $ and selling them.

Up
0

My prediction:

NZD/USD will hit 0.9 by Sep this year.

Up
0

Think of the RBNZ  as a yacht in the middle of the ocean in a storm

No matter how hard the captain  shouts at the sea to settle down it wont comply .

You cant change the sea conditions , you simply have to adjust and ride it out .

 

Up
0

You talk like a real 'boat man'.

Up
0

Maybe deploy a storm anchor to make the ride abit more comfortable? 

Up
0

Or he could stop shouting and start bailing, throw all them dollars overboard.

Up
0

Or he could stop shouting and start bailing, throw all them dollars overboard.

Up
0

Factboy, be careful what you wish for (unless of course youre an investor). Go talk to the emerging markets and see how much they enjoyed an uncontrolled fall in their currencies over the past year .....sharp fall in currency, sharp rise in inflation, even sharper rise in rates, well above NZ's.

Up
0

Kimy, I sell my cattle and get less NZ $ but they still buy the same as they are worth more. The problem is the internal cost structure does not adjust, and theres the rub.

Up
0

Just hand the job over to Rus norman.  He'll print a couple of billion more and see the NZD drops to below 40c USD.  Easy Peasy.. (sorry factboy, didn't see your comment but you have beaten me to it!)

Up
0

And double digit interest rates to go with it.

Up
0

Yet where has Russel N said he'll print "like mad"?

and dropping the NZD a bit is such a bad thing from the insane place where it is?

regards

 

Up
0

I wonder what that would do to the Fonterra hedges, especially now NZ can trade directly to CNY.

It would certainly cause the property markets to skyrocket!  Definately want to see a cap-gain tax in place before lighting that fuse !

Up
0

RBNZ is all about the Phillips Curve.

Since the unemployment rate is not going down, can we have a bit more inflation thereby a lower OCR please?

Up
0

or at least wait a bit....

regards

Up
0

For us economic numskulls...what investment will printing favour..shares, equity, cash (presumably not), real estate?  or is it anyones guess (as so much seems ot be these days).??..  

Up
0

Depends what you do with the printed money. If you just pass it to banks like in the USA then anything a bank has will benefit massively such as the examples you give. A better view is to pay off our debt overseas or fund infrastructure or the Christchurch rebuild with the funny money.

It doesn't have to be given to banks or their products.

Up
0

Well its not printing as such so its not that simple, however if you think we are going to get run away inflation then gold is a classic speculation.  Of course in the last year or so more than a few gold bugs have lost quaite a bit of $ on a play that didnt happen.  Dont here from them on how great gold is doing anymore of course.  

Personally I expect deflation and scarcity, so cash, get out of debt and lead seem sure bets.

regards

 

 

Up
0

The BNZ say this:

"The intervention has to be consistent with monetary policy. This means that you can’t be intervening to push the currency lower at the same time that you are raising interest rates. So, today’s comments are also a clear indication that the Bank is contemplating a pause in its tightening cycle while it tries to hobble the NZD."

The BNZ may well be correct, in terms of what the RBNZ will do-i.e. pause in their interest rate increases.

However I fail to see in logic why the RBNZ could not in fact raise interest rates to dampen demand for finance here- especially mortgage finance, but mitigating the currency effects of the pull effect of those higher interest rates, by selling NZD and buying foreign currencies/ securities. Indeed, under something like Labour's current account and inflation objectives, that would be exactly what you would do when the currency/ current account was too high, but local economic demand was running ahead of capacity and being inflationary.

I agree with Factboy and others who see a very simple solution.  I also note then that Grant and others jump on that solution, and claim that the currency will collapse, and inflation will go through the roof. That type of claim is extreme panicky nonsense. You clearly would buy enough foreign securities until some effect was had, remembering that the RBNZ want the currency to drop- presumably by the 10-15% that is widely talked about, but at least by 5% or so. Throw a billion at it, and see. Still not there. Buy another billion. And so on. 

Other posters suggest we would be somehow fighting the Fed, or other similar large central banks. Those banks don't really give a toss about the NZD; and for them to move their own currencies against a whole basket, they have to print 100 times more than we do. It is keeping your currency up that can be a challenge for some countries; having a couple of extra billion in foreign securities would help insure against that rainy day.

 

Up
0

Just give me the heads up so I can get my money out. Just need 24 hours.

Up
0

Mr Wheeler's given you notice; although his bark has proven far louder than his bite to date. 

Up
0

So what about the other 180 billion of foreign debt? Besides the Aussie banks own us, he ain't doing a thing without their say so.

Up
0

Sadly on deferring to the Aussie banks (who I assume have most of the currency risk) I suspect you may be right. Otherwise our actions don't make a lot of sense.

A Labour government just may challenge that paradigm, unless they too are all talk.

Up
0

I have Iconoclasts claim of $50B NZD per day being traded confirmed from a source close to the action. Of that about $12B is traded in the Asian session mainly by New Zealand company's, but by the time NY is done the $50B is about right. Wheeler only has chump change to play with.

 

Interesting advice though, the NZD is nowhere near as liquid as pre GFC.

Up
0

Nearly all of this trading has to be somewhat artifical, given the need for importers, exporters and genuine investors in and out of the country has to be a fraction of this amount. My understanding is that traders will chase margins of say 0.2%, (with stop losses in place) many over very short periods (like lunch); so $50 billion multiplied by 0.2% is $100 million, which is really at play. This has been a one way guaranteed bet while the RBNZ has stayed on the sidelines. In that context $1 billion would make a significant difference. $5 billion would really make a mark.

In any case if we really believe the currency is overvalued, (which the current account evidence supports) and it doesn't move with some investments by the RBNZ, then blow through the limit until it does. In the event of overshoot, then the foreign investments can be unwound (at an almost certain profit, even though that is not at all my reason for advocating this move).

Up
0

Yes fair call on the leverage. Where I am perplexed is that the $12B is apparently New Zealand companies doing legitimate business but that is out of proportion to our GDP. But Iconoclast did elude to money passing throught out shores that is essentially being laundered and that any spillover is not measures, hence no on really knows how much is inadvertently landing here and primarily finding a home in Auckland real estate.

Up
0

Again, as predicted, another cook up: this time by pollies lackey's fiddling around with the employment data variables - the "participation rate"- the unemployment rate is 5.6%. All choreographed today by stats and RB for the benefit of the dairy monopolies. It is dopey to rant that the NZD is "overvalued" - it just is what it is, compared to other moribund economies. Good luck to Wheeler taking on the world, tho we will all end up paying for his expeditions.

Ergpphobia  

Up
0

Why not just announce they will print for the sole purpose of lowering the currency? That alone will reduce currency inflows. They could throttle the effects by adjusting the ratio of printed/existing dollars. With the rest of the world using extraordinary measures to stimulate their economies why on earth shouldn't NZ?? As far as I can see an on-market sale of conjoured up NZD is not a direct injection into the NZ economy but-for any profits from the trade and benefits to export markets by way of a lower currency..... 

Up
0

Talk ain't cheap, though it does depend if you are going through a hedge backwards.

http://findata.co.nz/News/29333568/NZ_dollar_drops_after_RBNZs_Wheeler_…

Up
0

Why the need to lower the dollar (a kiwi obsession dating back to Muldoon times)? Milk prices are at record highs. Wine sales are up, lamb is picking up -all with a high dollar. As a salary worker I like the high dollar and had a great holiday in the USA last year!

Dont forget a lower dollar will raise all imports like cars, oil etc.

Up
0

Precisely skeeter, but you will find few friends here-  funny money types who want us Proles to subsidise fontera with a debased dollar, high fuel prices and inflation everywhere!

Regards, EP 

Up
0

because we have no internal economy to speak of.  We rely on foreign cash to fuel our internal spending (ie we're a nation of exporters and borrowers) so a low dollar means we have good liquidity.  A high dollar means we can't sell our produce to foreigners for profits, and we won't be able to afford to import for long (as we aren't resourced enough to develop a strong local world class economy, to support all our workers)

wine and lamb are up because the markets are currently tight, and a small deviation in the big world market means the small volumes we produce in NZ are significantly affected

Up
0

If Wheeler does decide to have a go, he may well be in some rather significant company........

 

http://www.bloomberg.com/news/2014-05-07/draghi-s-euro-angst-rising-as-…

Up
0

Graphically, NZ/US$ currency movements have, over the last four years, been constructing an enormous compression triangle (clearly visable on the monthly graph) which has been very interesting to follow on a daily basis since the formation first became recognizable a little more than two years ago. In short, according to the rule-of-thumb known to graphical analysts, this has a mathematical objective of .98c NZ to $US1.00. Personally, I've seen these graphical formations many times over the past 20 years and always marvelled at the fact that they always ultimately go to their objectives regardless of what happens in the world in the meantime. It's a very solid structure in a long term framework, meaning we are unlikely to see the objective before the middle of next year.

If the selling today was “intervention”, it has actually helped cool the “hyper-bought” status of the Kiwi, bringing the currency down again into the mid-range of the RSI index, a but as has been the case on many similar ocassions previously, the upwards movement is only retarded for a very short time before the trend resumes. On prior warning of intervention by the RBNZ I would imagine all the banks would be shorting too! Could have been a bumper day for some currency traders!

Up
0

the hyper-bought will never be cured while our carry is so profitable (and thus sell holdouts so poor)

Up
0

Carry trade of course reliant on out ability to pay so don't give up your day job yet Cowboy, and those 4:30am starts.

Up
0

It just gives people a hot place to park [big leveraged funds] when the USD is getting adventurous,, creating massive Buy pressure for short terms

Up
0

There used to be a graph on rbnz site that has nz house prices correlated to nzd. Very close correlation.

Not sure what causes what. Have tried finding the graph on rbnz but couldn't find it.

Be interest in anyone who can dig further into this.

My best guess. More $ into nz. Cheaper and easier for banks to lend and or pressure on banks to lend money to get returns. Property values up...

Up
0

Are you think of the charts the RBNZ have done of change in GDP to change in house prices? Which was actually turns into a bit of a dodgy relationship once you took away the percentage changes and looked at the raw dollar amounts. 

Up
0

Or significant amounts of property being brought with foreign currency? Hence why the graph has been discretely taken down?

Up
0

You may be thinking of the Trade Weighted Average. This shadows the NZ$/US$ almost perfectly. Take a look at some house price graphs fo NZ - they don't seem to bear any resemblance.

 

Up
0

Have a look at the volume of foreign exchange transactions within NZ and Auckland house prices by month over the past two years.

Up
0

Can't find.  Could you post a link for me? Thanks.

Up
0

Might have been twi and nz house prices. Was around 2006 2007 I remember seeing the graph on rbnz site with commentary on how they both went up and down together.

What are the mechanics of fx? When someone buys 1 billion nzd with usd, what physically happens? What does the buyer do with the nzd? Left in nz bank earning nz rates? How do the banks put that money to work? They have to lend. Pressure is on to lend.

Up
0

http://tinypic.com/r/35mpezd/8

 

TWI v house price index from 1990 to 2013.  TWI right scale.

If you looked at yoy changes the correlation would like better, but you get the idea.

NZDollar up = house price up.

Up
0

blue is twi, red is house price index

Up
0