NZ dollar drops after Wheeler says level 'unjustified and unsustainable'
By Jonathan Underhill
Sept. 25 (BusinessDesk) - The New Zealand dollar tumbled more than half a US cent after Reserve Bank governor Graeme Wheeler invoked two of the conditions for the bank to intervene in currency markets, saying its strength was "unjustified and unsustainable" given the decline in commodity prices.
Wheeler repeated the words he used in the July 24 official cash rate review in a statement titled: 'New Zealand's Exchange Rate: Why the Reserve Bank believes its level is unjustified and unsustainable.'
"We expect a significant further depreciation of the exchange rate as a result of the weakening in price of our dairy and log exports," he said. Based on past experience, declines in the kiwi from unjustified and unsustainable levels "can be large" given the limited overall liquidity in New Zealand dollar markets and the impact of investors cutting their positions or exiting the currency "when overall investor sentiment changes markedly."
The New Zealand dollar dropped to 80.12 US cents from 80.70 cents immediately before the statement was released. The trade-weighted index, the currency measure the Reserve Bank watches, fell to 77.77 from 78.27. It has fallen from as high as 88.35 US cents in July.
Imre Speizer, Westpac Banking Corp NZ senior market strategist, said the local dollar could test its big support level at 80 US cents, a level it hasn't fallen below since September 2013.
"It’s clearly a very strong talking down of the currency," Speizer said. "It is yet another intervention threat. We have had three, we have had the July meeting, we have had the September MPS and we have had this."
"The currency has fallen a bit over the last few weeks, so clearly it’s telling us that the currency even here is still too high, giving us a reminder it doesn’t like it and giving us another intervention warning," he said.
The central bank reveals any currency interventions in its monthly disclosure on foreign currency assets and liabilities. It is due to release figures for August on Monday, which may indicate the bank has been selling kiwi dollars to drive its currency lower. In July, the central bank had $8.62 billion of foreign currency intervention capacity, according to its data.
Speculation of intervention rippled through the market on Aug. 25, causing the kiwi to spike lower that morning.
Wheeler said there are legitimate reasons why the New Zealand dollar is relatively strong - rising export prices had pushed the nation's terms of trade to the highest levels since 1973 before prices of dairy products and logs began tumbling. Overseas investors had been attracted to the relative out-performance of the New Zealand economy, which spurred the bank to begin raising interest rates this year, widening the gap with US, European and Australian rates.
Thirdly, major central banks such as the Federal Reserve have been flooding the market with their currency while keeping interest rates near zero , heightening the appeal of yields available from the New Zealand dollar.
The kiwi dollar has been at exceptional levels compared with its history, Wheeler said. On a TWI basis, using historical data, it is above its 90th percentile against the greenback, yen and euro and close to its 90th percentile versus the Australian dollar and the British pound.