ECONOMETER

Following previous warnings threatening intervention to weaken the NZD the Reserve Bank of New Zealand (RBNZ) intervened to sell the currency. The impact was sharp, with NZD falling versus USD and against key crosses including AUD. The NZD has been one of the best performing major currencies this year although its appreciation of 1.33% is not dramatic. However, going back to its cyclical low in March 2009 NZD had appreciated by a massive 72.6% versus USD prior to today’s intervention.

Previous warnings by RBNZ governor Wheeler include a speech in February when he noted that the “kiwi is not a one-way bet”. However, he noted that while the central bank is prepared to intervene to weaken the NZD any intervention would “only attempt to smooth the peaks”.

The last time that the RBNZ confirmed that it had intervened was way back in June 2007 when NZD/USD was trading around 0.75. The intervention failed to prevent further NZD strengthening until late July 2007 when the kiwi slid around 17% against the USD but this fall was notably not due to FX intervention.

Although Wheeler noted today that the RBNZ is capable of more intervention he added the intervention is “designed to take the top off the currency” consistent with his earlier comments. The bottom line is that more smoothing is likely but a significant push to change NZD direction is highly unlikely. The overall trend in NZD is likely to remain gradually upwards although gains will likely be more gradual given likely market caution over further RBNZ smoothing operations.

Taking a broader view the RBNZ is playing a similar game to many other central banks in attempting to weaken or at least prevent strength in their currencies. The Bank of Japan (BoJ) is clearly succeeding in finally weakening the JPY, while the RBA in part cut policy rates yesterday due to the strength of the AUD. While a full blown currency war remains unlikely currency frictions are picking up. I prefer to play the latest move in NZD by selling it versus AUD where we I see more value.