Former FX trader Key, who was on a trade mission to Indonesia with NZ exporters on Monday, told the chair of the Indonesian economic committee that the NZD was overvalued due to weakness in the US and European economies. “We still want the markets to normalize,” he said. “We’ve been overvalued for a few days, but we’re considering what we can do to resist a rising exchange rate.”
However, barring further verbal intervention, the government has limited ability to impact the trend in NZD.
The Reserve Bank of New Zealand (RBNZ), which has operational independence from the government, was given the power to intervene in the currency markets in 2004 “to help trim peaks and troughs in the exchange-rate cycle that are unjustified by economic fundamentals”.
The RBNZ used those powers in June 2007, when it sold about NZD1.5 billion.
| RBNZ net NZD purchases and NZD trade-weighted index |
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| Source: RBNZ, Bloomberg, Barclays |
However, Hamish Pepper, strategist at Barclays Capital, says the RBNZ has set a high bar to justify FX intervention, including four criteria published in March 2005, which he does not think are being met.
Those criteria are, first, that the exchange rate must be exceptionally high or low. Second, the exchange rate must be unjustified by economic fundamentals. Third, intervention must be consistent with the policy targets agreement between the Reserve Bank governor and the minister of finance, and fourth, that conditions in markets must be opportune and allow intervention a reasonable chance of success.
Pepper argues the current yield and expected growth advantage that New Zealand enjoys over most other G10 economies broadly supports current NZDUSD levels.
Furthermore, he says, the NZD trade-weighted index is still more than 4% below the mid-2007 highs, according to his estimates. Finally, he adds, it is not clear that FX intervention would be compatible with interest rates priced to rise from historical lows.
“We thus think the RBNZ is unlikely to intervene in the FX market to weaken the NZD or even stop appreciation,” says Pepper.
“This does not preclude unexpected rate cuts or RBNZ verbal intervention to warn about the risks associated with a fast-appreciating currency.”