The probability of a sharp fall in the New Zealand dollar appears to have increased, with this likely to occur if global economic conditions continue to deteriorate, the Reserve Bank of New Zealand says.
The RBNZ made the comment in its November Financial Stability Report, in which it said risks to New Zealand’s economy and financial system had increased since May, due to turbulence and uncertainty in global markets.
“As global risk appetite has shifted towards safe havens more recently, the NZD has depreciated against the US dollar,” the Reserve Bank said.
“Carry trades have become less attractive, particularly as exchange rate volatility has increased. The cost of insuring against NZD depreciation implied by option prices has also increased, suggesting that the perceived probability of a sharp depreciation in the dollar has increased,” the RBNZ said.
Sharp depreciation would likely occur if global conditions deteriorate and investors sought to reduce exposure to risky positions such as carry trades on the New Zealand dollar.
“With most of New Zealand’s debt effectively denominated in domestic currency, a depreciation of the NZD would help to insulate the New Zealand economy in a global downturn scenario, and would not be expected, by itself, to create significant financial stability risks,” the Reserve Bank said.
The New Zealand dollar had risen to a post float high of 88.4 US cents in early August, on the back of robust emerging market growth and strong and strong gains in commodity prices, the RBNZ said.
“‘Carry’ trade inflows also supported the NZD and the Australian dollar, with low US interest rates and strong risk appetite encouraging investors to borrow in US dollars and to invest in higher interest rate environments,” it said.
“Some emerging economies with relatively high interest rates also experienced significant carry flows.”
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11 Comments
I have to say, that whilst lower interest rates and a lower dollar do not suprise me, I would be getting a might nervous about these developments as a New Zealand citizen. NZders look to be staring down the barrel of artificially lower lending rates ( to encourage debt retirement, not further speculation - the policies in that regard may wait till after 26.11) and higher necessity costs brought about by higher import costs. Wages cannot take up the diference whilst unemployment looks to go higher, and immigration will not look attractive from the outside whilst the economy sinks further. The answer, in the longer term is higher interest rates of course; either by design or default...and that will likely knacker anyone with debt of any sort.
Riiiiiiight and the lower Kiwi means imported inflation of the oily fuel type and that means a drop in retail activity etc etc and falling revenue for wild bill and the much promised surplus has turned to what!
Meanwhile down at Labour Party HQ cunny is putting todays blather together...another promised handout and more idiocy about deeper debt being good for us...
Rising rates as the banks face much more costly refi loot EVERYWHERE they go cap in hand....and you dear reader who holds a mortgage...you are set to discover the truth about the cost of debt.
Every time the AUDNZD is about to tumble the RBNZ gets very vocal and shuns the NZD. That is all they seem to care about. The rest is a lot of bla bla bla. trying to sound clever. The NZD is loosing it´s yield appeal by the minute... What if the easy money stops flowing? What if the music stops?, Do you guys think you are any different from Italy?
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