New Zealand’s central bank intervened in foreign-exchange markets last month, selling the most currency in seven years to weaken the nation’s dollar.
The Reserve Bank of New Zealand (RBNZ) sold a net NZ$521 million ($404 million) in August, the biggest sale since July 2007, data published on its website showed Sunday. The kiwi dropped on the news, falling to its lowest level since Aug. 5, 2013, Bloomberg reported.
Governor Graeme Wheeler warned last week that the kiwi’s level was unjustified and unsustainable, invoking the bank’s criteria for intervention. The strong currency has suppressed inflation, prompting the central bank to pause its policy tightening after raising interest rates four times this year.
“The important information in today’s release is the confirmation that the RBNZ is willing to intervene at times when the New Zealand dollar is seen as unjustified and when market conditions are ripe for a successful intervention,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. “In that light, we wouldn’t be surprised to see further selling over following months.”
The kiwi fell as low as 77.09 US cents from 78.28 cents before the data were published and traded at 77.49 cents at 6:53 p.m. in Wellington. Its so-called “Goldilocks” level of not too high and not too low is around 65 cents, Prime Minister John Key said.
Peashooter
The strong currency has been a headwind for New Zealand exporters as the nation recovered from a recession in 2008-2009 triggered by the global financial crisis.
Key, who won a third term in a Sept. 20 election, told reporters that the currency is “overvalued” and central bank intervention seemed “fairly logical.” Intervention only works when targeted and can’t act against fundamentals, he said.
Finance Minister Bill English said last year that the South Pacific nation of 4.5 million people can’t expect to take on the $4 trillion-a-day currency market because it has the firepower of a “peashooter” by international comparison.
The RBNZ’s foreign currency intervention capacity was NZ$9.56 billion in August, up from NZ$8.62 billion a month earlier, today’s data show.
In 2007, the central bank sold NZ$2.36 billion over three months, with sales peaking at NZ$1.49 billion in July, after the currency got to its highest level since it began freely trading in March 1985. The RBNZ also intervened to weaken the kiwi in early 2008, with cumulative sales of NZ$1.64 billion over five months. Smaller amounts were sold in late 2012 and early 2013.
Today’s (Sunday) drop extended the kiwi’s decline to more than 12 percent from a peak of 88.36 US cents on July 10. While the currency has weakened since Wheeler paused raising rates, at 3.5 percent the RBNZ’s benchmark is still among the highest in the developed world, making New Zealand assets attractive to investors.
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