NZ$ at 'unjustified, unsustainable' level

Currencies

RBNZ Governor Graeme Wheeler says NZ$ 'well above sustainable level', susceptible to significant value drop

25th Sep 14, 2:13pm by Gareth Vaughan

The level of the New Zealand dollar is unjustified and unsustainable and it is susceptible to a significant downward adjustment over the next six to nine months, Reserve Bank Governor Graeme Wheeler says.

In a statement released by the Reserve Bank, Wheeler said the level of the dollar is unjustified when it is inconsistent with the economic factors that typically explain its movement during a business cycle.

Wheeler's comments pushed the New Zealand dollar below US80 cents to US79.99c, its lowest level since Sep 9, 2013.

“The Bank’s analysis indicates that the real exchange rate is well above its sustainable level, and also above levels justified by short-term business cycle factors,” Wheeler said.

“Unjustified and unsustainable are important considerations in assessing whether exchange rate intervention is feasible. Another consideration is whether conditions in the foreign exchange markets are conducive to intervention having an impact on the exchange rate."

“The real exchange rate has not adjusted materially to the recent downward movement in commodity prices. For example, global dairy prices have fallen by 45% since February 2014. Despite this, in August, New Zealand’s real effective exchange rate was 1% higher than its February 2014 level," said Wheeler.

"Past experience suggests that when the New Zealand dollar begins depreciating from an unjustified and unsustainable level, the ultimate adjustment can be large."

The New Zealand dollar is at exceptional historical levels, Wheeler said, noting the Trade Weighted Index (TWI) is above its 90th percentile calculated from historical data.

"Relative to the US dollar, Japanese yen and the euro the exchange rate is above the 90th percentile. It is close to the 90th percentile against sterling and the Australian dollar."

However, Wheeler said that past experience suggests when the New Zealand dollar begins declining from an unjustified and unsustainable level, the ultimate adjustment can be significant. He also said the Reserve Bank would welcome a move towards a more sustainable exchange rate level.

He said several factors could cause a change in financial market sentiment. These include a deterioration in global risk appetite, further falls in New Zealand’s commodity export prices, a slowing in New Zealand’s or China’s economic growth, and stronger indicators of economic growth in the United States.

"Under the current US outlook, the Federal Reserve is expected to start raising interest rates in the second or third quarters of next year. A stronger outlook for the US economy would likely trigger greater investor flows into the US dollar on the expectation that the Federal Reserve would begin to tighten sooner," said Wheeler.

"In the Reserve Bank’s view, the combination of these factors makes the New Zealand dollar susceptible to a significant downward adjustment over the coming six to nine months. Such an adjustment would be welcomed by the Bank as a move towards a more sustainable exchange rate level."

Here's the conclusion from the Reserve Bank's statement in full

Our modelling work indicates that the real effective exchange rate is above the level that can be justified by cyclical economic variables and that its current level is unsustainable over the longer term.

The nominal TWI is currently 4 percent below the historical high reached in July 2014. This decline in the TWI is small in relation to the 45 percent fall in global dairy prices since February 2014. We expect a significant further depreciation of the exchange rate as a result of the weakening in price of our dairy and log exports.

Past experience suggests that when the New Zealand dollar begins depreciating from an unjustified and unsustainable level, the ultimate adjustment can be large. Some of this reflects the limited overall liquidity in the New Zealand dollar markets, and the potential for pricing discontinuities when overall investor sentiment changes markedly and investors cut or exit their positions in volume.

Several factors could cause such a change in financial market sentiment. These include a deterioration in global risk appetite as the result of an adverse economic or geo-political shock, further declines in New Zealand’s commodity export prices, a slowing in New Zealand’s or China’s economic growth, and stronger indicators of economic growth in the US. Under the current US outlook, the Federal Reserve is expected to start raising interest rates in the second or third quarters of next year. A stronger outlook for the US economy would likely trigger greater investor flows into the US dollar on the expectation that the Federal Reserve would begin to tighten sooner.

In the Reserve Bank’s view, the combination of these factors makes the New Zealand dollar susceptible to a significant downward adjustment over the coming six to nine months. Such an adjustment would be welcomed by the Bank as a move towards a more sustainable exchange rate level.

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Source: RBNZ

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23 Comments

by speckles | 25th Sep 14, 2:22pm 1411611740

Need to talk it down to reduce the cliff diving export receipts...

by Zombie ponzi | 25th Sep 14, 3:01pm 1411614113

The exchange rate is far lower now than when the RBNZ started hiking.

If it wasn't for the LVR rules rate hikes would have started sooner.

As the exchange rate drops, watch tradable inflation rise - this is the only thing keeping NZ's overall inflation number low.

Property speculators don't know how lucky they are to have a governer who has possibly saved the NZ property bubble from popping big time. Look at what too low for too long did in the US and keep in mind NZ has moved from record low interest rates to low interest rates.

by Grant A | 25th Sep 14, 9:21pm 1411636889

Very true Zombie - Wheeler wants and needs a weaker NZD to support the productive sector which has done brillianty to date to overcome it, but there are limits to that. And he needs it so he can keep pressuring interest rates higher next year to fix what is the bigger problem for him, the less productive sector, housing.

by Simon | 25th Sep 14, 2:54pm 1411613672

it'l be 70 against the US in 2 months. Hence why I was buying stocks denominated in USD when the cross was hitting 88-89 a couple of months ago.

25% gain from currency a lone, plus an ok div in USD, so getting better by the day.. hence why these things cycle..

by moa man | 25th Sep 14, 3:07pm 1411614459

Serious bit of Jawboning there. But as they say, never fight the fed!

by Stephen Hulme | 25th Sep 14, 3:30pm 1411615857

Yep, and the Bank of Japan is making it difficult for Mrs Watanabe to not buy NZDJPY.

The Bank of Japan is growing into its role as a key source of support for the country's stock market, as it has stepped up purchases of exchange-traded funds to bring its equities portfolio to an estimated 7 trillion yen ($63.6 billion) or so.

The central bank bought 123.6 billion yen worth of ETFs in August, the largest monthly tally so far this year. At one point, it snapped up ETFs in six straight sessions amid weak stock prices Read more

by gordon | 25th Sep 14, 3:27pm 1411615661

Those holidays and goods being purchased by X and Y are going to cost them more.

by Zombie ponzi | 25th Sep 14, 4:24pm 1411619079

More like those houses and farms being sold by the boomers are going to get cheaper for foreigners.

by notaneconomist | 25th Sep 14, 4:19pm 1411618776

One of the interesting things about cycles is the master who is pulling all the strings!

Wheeler is not talking the NZD down for the benefit of locals like farmers or exporters!

I think he his more concerned with fighting deflation and keeping to the policy target agreement of price stabilty of annual increases in the CPI of 1 and 3%.......

by Stephen L | 25th Sep 14, 7:55pm 1411631709

What has prompted this statement 5 days after an election? Is it part of Mr Wheeler's regular announcement/ speaking cycle, or has he especially saved it for post election? Given he had said the same thing a month ago, I don't have a particular problem with him restating this position. If though it turns out that he has started intervening in the markets only this week, then that would strongly suggest he has been captured by the National government, in saving any intervention until after the election. That would strongly suggest he is no longer independent, and would be a considerable concern.

It is good that he understands the damage of a high currency; not so good that in the past he seems to have gone along with the Nats' view that there's very little he can do about it, when of course there's plenty he can do.

I've noted the Australian media being far more vocal recently in supporting their dollar declining. Our mainstream media still seem to talk of appreciation being a good thing, and depreciation being bad.

by Basel Brush III | 25th Sep 14, 8:21pm 1411633274

BE probably "told" him to hold back.

With a full three years to allow the electorate idiot sucker voters to forget, Key has enough time to take a big drop now and then tell us all in 2017 :

"You have never had it so good. Just look how our exports are doing fine now"

Just shows a political bent by Wheeller.

Now to hit the foreign property speculators where it hurts and they will have to leave with their decimated dollars.

Always hopeful.

by KH | 25th Sep 14, 8:16pm 1411633019

Methinks Stephen L, that if Mr Wheeler had done his jawbone a week before the election it would also have convinced you the national governent had captured him.

by Stephen L | 25th Sep 14, 8:32pm 1411633954

KH,

As I've noted above, he had jawboned earlier, so the jawboning itself is fine. The populace like the cheap petrol and cheap overseas holidays, but don't make the connection that a high currency is affecting their jobs and income over the long term. They probably ignore the jawboning, but would start to notice an actual drop in the exchange rate. The markets have pretty much always ignored the jawboning in any case. It is the actual intervention which would suggest a capture. If he started that a month ago when he last made exactly the statement noted in the article, then no problem. If he has not started it this week or next, then no problem. If he has started this week, then it begs the question why now and not a month before the election, when he made exactly the same statement.

Given National have form in terms of undue influence over public servants for political purposes- see Nick Smith and Judith Collins- this capture if true would be another serious sign of a very concerning trend.

Most of Wheeler's other statements have been part of a regular speaking cycle. Why this week? And has the intervention started? The NZD made its biggest drop in years against the GB pound today. Coincidence?

by Basel Brush III | 25th Sep 14, 8:59pm 1411635566

Wheeler could and should have been more forceful but Key did not want any wobbles prior to election. I suggest that a word was spoken however quietly.

After the recent dirt I may be easily swayed that all is rotten at the top.

by Basel Brush III | 25th Sep 14, 9:01pm 1411635700

Wheeler could and should have been more forceful but Key did not want any wobbles prior to election. I suggest that a word was spoken however quietly.

After the recent dirt I may be easily swayed that all is rotten at the top. If anybody could, Key could with his type of CV

by Spider | 26th Sep 14, 12:09am 1411646981

I'd say the drop was more due to the US Fed Fisher's comments about raising interest rates sooner rather than later (US Spring 2015)...but hey, what do I know.

by Zombie ponzi | 26th Sep 14, 9:48am 1411681704

Given the similar fall in the AUD you could well be right

by Boatman | 26th Sep 14, 1:21pm 1411694500

Tongue in cheek .......If you were a 20 year old and somehow found yourself in one of those dating clubs full of sickly looking, baggage laden old divorcees, and noticed the only single , young, fit ,healthy good looking woman in the crowd , what would you do ?

Its the same with currencies , the room is full of ugly old goats with all sorts of problems , and the Kiwi$ is relatively attractive .

For now .

by steven | 26th Sep 14, 1:38pm 1411695506

until you look behind it ans see that we are a one trick pony all in a housing bubble, poor funidentals....just set to pop..

maybe an injection for STDs is needed.

gonna hurt.

regards

by cowboy | 26th Sep 14, 2:12pm 1411697562

If there's only one other interesting person in the room I'd have to ask myself:

(1) What am I doing here

(2) WTF are they here.

I'd be seriously concerned about buying-in to whatever problems keep her in this company.

by Carlos67 | 26th Sep 14, 3:10pm 1411701045

Why does our currency have to be at the value of toilet paper ?The Aussie dollar went at 1:1 with the USD and did we hear them complain ? All it does is reduce massive proffits to smaller ones for big companies who are not passing any of it on to the employees anyway in terms of pay rises so why do we care? Everyones getting cheaper imported goods now in whats becoming a retail driven economy here !

by cowboy | 26th Sep 14, 3:52pm 1411703527

You're not getting pay rises because the "retail driven economy" you talk about is often owned by foreign based countries who see no reason to leave money to fools. Those are the companies not passing the pay rises to Nzers.

The smaller companies, the locally owned companies, often don't have the cheap finance, bulk buying, and centralisation efficiency that the big multinationals do (and also pay more in NZ tax). They are often paying enough in wages and expenses that it's hurting (which is why many go out of business trying to compete).

Are you aware of what a higher currency does? Since we don't have manufacturing or other internal product and services to employ people? It makes it even harder for NZ companies to compete inside NZ, that's even less pay rises to you. And when you bank borrows 1 billion US Dollars, it means they have less NZ Dollars to spread around (so they have to charge more to cover the US interest cost).

Yes petrol is more expensive, yes imported toys are more expensive. But where do you think the money is coming into NZ? It can't come from the government. the higher dollar means internal NZ businesses are too expensive to make money. So money has to come from export or from our businesses overseas. And a higher dollar means those overseas businesses deliver less NZ Dollars in profit, and exporters get less NZ Dollars to pay the government's internal bills.

A high dollar is an ego game, and is no use in an economy built the way ours is.

by Craig | 26th Sep 14, 4:09pm 1411704567

Carlos,

Yes the Aussies were complaining - a lot. I guess you missed it. Even the RBA Governor was very public about dropping their cash rate to reduce their $ price.

There are very few, if any, exporting compaies making 'massive profits'. Showing a lack of understandin there, they are mostly on single digit now due to currency - and don't say put your price up, the prices range is set by competitive overseas markets.

I guess I just haven't seen the 30% reduction in imported goods prices to match the currency increases.

Many service industries in NZ would not exist if manufacturing or exporting companies disppeared.