NZ dollar overvalued, but no quick fixes to lower it – RBNZ
WELLINGTON (Reuters) – The New Zealand dollar is significantly overvalued compared with its economic fundamentals, but there are no quick means to bringing it down, including intervention, the central bank governor said on Wednesday, skittling the currency by nearly half a cent.
Reserve Bank of New Zealand Governor Graeme Wheeler said part of the currency’s strength reflected global imbalances, a weak US dollar, and New Zealand’s improved terms of trade, but he said there were no simple solutions, including intervention.
“Given the strength of recent capital flows, we can only attempt to smooth the peaks of the USD/NZD exchange rate; we cannot determine the level,” Wheeler said in a speech to a business group.
He said the RBNZ had four criteria for intervention – whether the exchange rate was at an exceptional level, whether it was justified, whether intervention would be consistent with monetary policy, and whether it was likely to succeed. However, he said it was unlikely to have a sustained impact in bringing down the exchange rate but it could ease pressures in the short term.
“When the NZ dollar is coming under upward pressure, we want investors to know that the Kiwi is not a one way bet,” Wheeler said.
The New Zealand dollar fell nearly half a cent to a low of $0.8411 after Wheeler’s comments.
It also lost ground on cross rates against the Australia dollar, euro, and yen, sending the trade weighted New Zealand dollar index, the RBNZ’s preferred currency measure, down around 0.6 per cent, after hitting a post-float high last week.
“He said that he was ready to intervene if required, but he added that four criteria have to be met, and they’re certainly not met yet,” said Tim Kelleher, head of institutional sales at ASB Bank.
The kiwi, along with the neighbouring Aussie and other commodity linked currencies, have risen strongly this year, as central banks have effectively printed money, lowering their exchange rates, in a bid to stimulate their economies. Last week, the Group of Seven and the Group of 20 called for members to allow market determined exchange rates.
Wheeler reiterated previous comments that quantitative easing measures as practised by some economies would unlikely to be successful in New Zealand.
“Quantitative easing would increase inflation, raise inflation expectations, stimulate asset prices, and lead eventually to higher interest rates,” Wheeler said, adding that a Switzerland-style capping of the New Zealand dollar would be highly inflationary.
Finance Minister Bill English last week dismissed the idea of cutting rates or directly intervening in currency markets, saying New Zealand was too small and should not risk its limited funds.