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Kiwi falls on dollar speech from RBNZ's Wheeler

Kiwi dollar falls as RBNZ's Wheeler pledges intervention 'when circumstances are right'

By Paul McBeth

Feb. 20 (BusinessDesk) - Reserve Bank governor Graeme Wheeler has told manufacturers he will intervene in currency markets if the circumstances will let him smooth the peaks and troughs, though he can't set the level of the currency. The kiwi dropped half a US cent after the speech's release.

In a speech entitled, 'manufacturing decline not just a dollar story', Wheeler told the New Zealand Manufacturers' and Exporters' Association the kiwi dollar is significantly over-valued, and he "will intervene when the circumstances are right."

The RBNZ can intervene in currency markets when the kiwi is at exceptional levels that aren't justified, is consistent with monetary policy, and when it will work. The local currency dropped to 84.03 US cents from 84.61 cents immediately before the speech notes were published.

"The Reserve Bank is prepared to intervene to influence the kiwi," Wheeler said. "But given the strength of recent capital flows, we can only attempt to smooth the peaks of the USD/NZD exchange rate; we cannot determine the level."

Since taking the Reserve Bank reins in September last year, Wheeler has criticised the strength of the kiwi dollar, calling it overvalued and saying it's holding back the economic recovery. He has previously ruled out intervening in currency markets, which he says wouldn't have a sustainable influence on the kiwi.

Meanwhile, the high dollar has become an increasingly heated political issue, with an Opposition party inquiry into what it has called a crisis in New Zealand manufacturing, the Labour Party calling for monetary policy to target more than just low inflation and the Green Party arguing the case for quantitative easing, or printing money.

"When the NZ dollar is coming under upward pressure, we want investors to know that the kiwi is not a one-way bet," said Wheeler.

The central bank sold a net $199 million of its cash reserves on foreign exchange markets in December when the trade-weighted index was an average 73.92, adding to the $64 million sold in November.

That's the biggest monthly sale since mid-2008 when the kiwi dollar plunged going into the global financial crisis.

Wheeler told manufacturers there is no simple solution in dealing with the exchange rate, saying he would use the official cash rate as required by monetary policy needs, and macro-prudential tools to address financial stability issues which may have spill-over effects on the currency.

"But further efforts to improve the level and productivity of capital that labour works with, to reinforce ongoing fiscal adjustment, to re-examine the factors that diminish and distort the incentives to save and invest, and to reduce the dependence on the savings of others, have to be a major part of the solution," he said.


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