Rbnz Moves To Protect $nz

Sydney Morning Herald

Tuesday June 12, 2007

Jacob Saulwick

THE Reserve Bank of New Zealand has intervened in the foreign exchange market to cap the level of the NZ dollar for the first time since the currency was floated in 1985.

The RBNZ's move comes after the kiwi dollar surged to a record post-float high of more than US76c.

"This is a pretty huge step for any central bank," Macquarie Bank's director of foreign exchange, Geoff Bowmer, said yesterday.

The New Zealand dollar immediately fell below US75c following the intervention. It traded at US74.95c yesterday afternoon.

Last week the RBNZ shocked financial markets when it lifted the country's official cash rates to a record 8 per cent, its third rate rise in four months.

The rate rises boosted the New Zealand dollar, which has benefited from the so-called carry trade, where investors borrow in low-interest rate currencies like the yen to swap into higher yielding currencies like the New Zealand dollar.

Market analysts were sceptical about whether the intervention could successfully break the market sentiment that has favoured the kiwi, which has been one of the world's biggest gainers since the start of the year.

"I think we are in for a little bit of a battle," Macquarie's Mr Bowmer said, predicting that traders might try to "beat" the RBNZ through buying the currency and forcing the price higher.

Echoing Mr Bowmer, the London-based managing director of TD Securities, Stephen Koukoulas, said in a note to clients, "the RBNZ action is like a red rag to a (New Zealand dollar) bull. If the RBNZ was wanting to stem the New Zealand dollar gains, it would not have hiked interest rates as aggressively as it has this year."

The RBNZ's governor, Alan Bollard, was given the capacity to intervene in the foreign exchange market in 2004 if it became "exceptionally and unjustifiably" disorderly.

But while the Reserve Bank of Australia trades in foreign exchange when it feels the dollar has been considerably overshot, the RBNZ had, until yesterday, stayed away from intervening in the market.

The popularity of the carry trade caused a surge in the trading of foreign exchange derivatives in the first three months of 2007, a report by the Bank for International Settlements released yesterday said.

Turnover in contracts on the New Zealand dollar more than doubled in March, while volumes in Australian dollar derivatives, which also benefits from the carry trade, increased by 85 per cent in that month, the report said.

Mr Bowmer said the Australian dollar may lose some ground as investors become wary of the carry trade: "If they are effective it puts the sword through the yen carry trade."

© 2007 Sydney Morning Herald

Back to News Index | Back to Home