By Roger J Kerr
The rise-and-rise of the NZ dollar over recent weeks is causing grave concern across the economy, except for those booking the overseas holidays or buying a new piece of plant/machinery.
The question is whether the Kiwi dollar speculators and carry-trade protagonists really believe that the RBNZ has delivered them a one-way bet on the Kiwi dollar appreciating further, or are these long-Kiwi dollar players also just as wary of the RBNZ threat of FX market intervention?
The contradicting signals from the central bank at this time are something of a worry for the financial markets and business community.
These mixed signals from the RBNZ and to date the lack of follow-through on warnings of intervention results in a loss of credibility and thus reduced potency of any future jawboning down of the currency.
The four pre-conditions/criteria for intervention by the RBNZ selling the NZ dollar are fulfilled in my opinion.
The questions whether Kiwi dollar would be consistent with the RBNZ monetary policy target agreement of annual inflation at 2.00% is a resounding “yes” as importers a heavily hedged 12 to 18 months forward.
The Kiwi dollar could fall 10% to 15% against the USD and only petrol prices would in increase as the oil companies do not really hedge the FX risk.
The hedge position means that the inflationary impact of a much lower Kiwi dollar would be delayed and muted and the RBNZ should know this.
In the short-term the NZD/USD rate has run into major resistance from moving above the 0.8780 level, the peak it jumped up to immediately after the 12 June RBNZ Monetary Policy Statement.
The TWI reached another post-float record high of 81.6 last week, however it has retreated a touch to 81.45 at the time of writing.
The markets are fully expecting another 0.25% OCR increase at the next review in late July. The RBNZ will therefore have another opportunity to deliver some more effective currency intervention by surprising the markets with a “no change” OCR decision.
Since the more hawkish than expected 12 June MPS the local banks have all increased their mortgage lending interest rates, so the RBNZ will be somewhat happier with the tighter monetary conditions on that score.
The risk to the economy from higher inflation by not increasing the OCR at the next review would seem significantly less than the risk to the economy of the record high NZ dollar value driving job losses in the export sector.
Lower wholemilk powder prices at this week’s Fonterra/GDT online auction may be the further evidence the RBNZ need to force a change to their pre-set monetary tightening plans.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
2 Comments
Roger,
All your points seem valid to me, which begs the question why Mr Wheeler has not followed through with any action re the dollar. He does seem very conservative by nature, but that aside, you wonder whether he doesn't wish to upset the National apple cart. The media still report the dollar going up as good news, and a drop as bad news. Quite why, I can never really understand. I suspect Bill English and John Key would like the dollar to defy gravity for another 3 months, and that message will have been received at the RBNZ.
Roger,
All your points seem valid to me, which begs the question why Mr Wheeler has not followed through with any action re the dollar. He does seem very conservative by nature, but that aside, you wonder whether he doesn't wish to upset the National apple cart. The media still report the dollar going up as good news, and a drop as bad news. Quite why, I can never really understand. I suspect Bill English and John Key would like the dollar to defy gravity for another 3 months, and that message will have been received at the RBNZ.
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