Summary:
- The RBNZ has raised rates again for the fourth time in five months.
- The NZD/USD tumbled nearly 1.2 percent in early trading.
- The RBNZ has hinted strongly at imminent intervention in the Forex Market to curb the Kiwi’s high price level.
The New Zealand Dollar, affectionately called the Kiwi, was and is the current love of Forex investors. However, the bottom fell out todays after the Royal Bank of New Zealand (RBNZ) warned they were not happy with the Kiwi’s strength. They also hiked the prime interest rate for the fourth time in five months.
During its remarks, earlier today, the RBNZ called the current price level of the Kiwi “unjustifiable” and not “sustainable.” This cause investors to start speculating the bank was getting ready to intervene and the NZD/USD sunk 1.2 percent in early trading to a low of $0.8595.
This was an overreaction of the Forex market as investors did not like the word “unjustified” as the RBNZ described the level of the Kiwi. When a central bank uses words like this, it usually signals an impending intervention in the Forex market. Other terms we hear are “exceptionally high or low” but the conditions in the market must be opportune to allow any intervention to have a chance to succeed. The intervention must be on par with policy targets (Policy Targets Agreement) which is key foundation with the RBNZ monetary policy.
The words, and how strong they phrased them, suggest the criteria for a RBNZ intervention have been met and we have been given notice they will use wider tools in their inventory at any moment. The RBNZ has put short NZD/USD positions on notice that any more strength will see an official response.
The NZD has appreciated almost 7.7 percent this year as it is being driven by strong domestic momentum. New Zealand’s terms of trade is at a 40 year high and the central bank has been hiking rates to help slow their accelerating economy down. This morning the RBNZ raised its prime rate 25 basis points to 3.50 percent. This is its highest level in five years. In comparison the U.S. Fed Fund’s rate is between zero and 0.25 percent. The Australian prime rate is at 2.50 percent.
Still, the Kiwi should start to give back recent gains and trade between $0.80 and 0.85 by the end of the year. Why? The U.S. Dollar is gaining momentum as the Fed ends its QE program and an impending rate hike looms. We are also seeing a decline in value of New Zealand’s leading export which is dairy products. We are seeing dairy prices showing a year to date decline of nearly 28 percent. Tensions in the Ukraine and Middle East should also weaken the Kiwi as cash flows move towards safe havens like the Dollar and Gold. That and the “feel good news” for the currency is already priced in which means it should not move too much higher. With that said, dips in the price will be bought limiting the downside. All of this should make the RBNZ happy.