New Zealand Government Trying to Halt Rise of Kiwi Dollar
June 11th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
UPDATE: 6/12/2006: Well, That Didn’t Take Long: New Zealand Dollar Rises as Investors Return to Higher Yields
Maybe the New Zealand Government should try… spit balls?
Well, I’m not the senior currency strategist at Banc of America Securities, but that guy just said almost exactly what I said yesterday.
Via: Bloomberg:
The New Zealand dollar gained as investors were lured back to the nation’s higher-yielding assets after the central bank sold the currency yesterday.
New Zealand’s record 8 percent benchmark interest rate has helped the currency, known as the kiwi, gain 7 percent this year. The highest borrowing costs after Iceland’s among AAA-rated countries, and the chance of further increases, is helping the local dollar pare losses after the central bank said those gains were “unjustified” and announced its had sold the currency.
“As long as there is a possibility of vigorous monetary policy, the New Zealand dollar is going to get buyers,” said John Rothfield, senior currency strategist at Banc of America Securities LLC in San Francisco. “There is nothing out there that says the kiwi is going to go down significantly despite this intervention.”
— End Update —
So, there is a limit to the yen carry trade nonsense…
In theory, at least.
Any of several firms are capable of moving a currency like the New Zealand dollar in any direction they choose. Could the kiwi dollar continue to be squeezed higher? This probably won’t happen, but, yep. Big time.
If it does get squeezed higher, regardless of the central bank’s actions, the New Zealand government could be forced to use non market methods to control the thing. * gasp * That would rattle the chook house. Of course, anyone in polite circles would call that “crazy talk” at this point; like much of the stuff on Cryptogon that eventually came to pass. The fact is, the New Zealand government is NOT in control of its own financial house. If it was, they wouldn’t have let this nonsense go as far as it has. Now, they’re going through all the motions, talking tough and maintaining appearances, but don’t be surprised if the global casino operators look at the Reserve Bank of New Zealand and say, “Pfft! How’s about a game of chicken, boy!?”
I find it interesting that the RBNZ did this on a low liquidity day. It’s easy to get results when the bullies aren’t in the sand box, eh?
Let’s see how much They want that easy money yen carry trade to continue.
Via: Bloomberg:
New Zealand’s dollar slumped after the central bank intervened in the foreign exchange market saying the economy’s outlook doesn’t justify the currency’s rise to a 22-year high.
“We regard current levels of the exchange rate as exceptional and unjustified in terms of the economic fundamentals,” Reserve Bank of New Zealand Governor Alan Bollard said in a statement in Wellington. The sales were the first announced by the central bank since it set up a NZ$7 billion ($5.3 billion) fund to stabilize the market in 1990.
“People now know that the New Zealand dollar has a limit,” said Michael Gordon, currency strategist at Westpac Banking Corp. in Wellington. “It’s a lesson on how high the currency can go without consequences.”
Traders may be discouraged from buying New Zealand’s bonds and bills using borrowed yen, known as carry trades. The New Zealand dollar climbed 19 percent against the U.S. currency in the past year, causing exporters to shift manufacturing jobs overseas.
The currency bought 74.98 U.S. cents at 9:49 a.m. in London from 76.37 cents in late New York trading on June 8. It slumped as much as 2.1 percent from 76.39 cents, the highest since being allowed to trade freely in March 1985. New Zealand’s dollar fell to 91.26 yen from 92.95 in New York on June 8.
COINCIDENCE THEORY
G8 meeting and Bilderberg conference complete. Financial, Immigration and International relations around the world destabilize. Coincidence.
http://www.financialarmageddon.com/2007/06/goodbye_to_the_.html
Perhaps it is nothing more than coincidence. Many analysts, for example, might view recent financial market turmoil as a knee-jerk response to global monetary policy changes. By the same token, political observers might interpret the near-term scotching of immigration reform as an unfortunate byproduct of pre-election posturing. Those who follow international affairs might blame developments in Turkey and Pakistan on fallout from the war in Iraq.
Even so, it is hard to believe that this abrupt and widespread change in mood, coursing as it has through the world of money, politics, social relations, and international affairs, is mere happenstance. Or that a wide range of catalysts with nary a common thread between them all seem to be causing events to turn in the same destabilizing direction.
Bollard has found himself in a bit of a rock/hard place situation. On the one hand he needs to cool down the insane mortgage lending that has fueled the housing bubble (not to mention the proliferation of consumer lending). On the other hand he cant let the dollar get too high, as that damages the exporters we desperately need to reduce our trade deficit. If he wants us to stop spending, then raising rates may have the opposite effect. As our dollar gets pushed higher by the carry traders looking for high yields, the imported goods we spend our money on (cars, LCD TVs etc) get cheaper, so we buy more. I’m no central banker, but maybe the way to solve this is to keep rates low, but somehow tighten lending criteria in other ways – eg: mandatory minimum deposits on mortgages or raising the required reserve ratio at the banks.
@ GeoffT: Agree with everything you said, tighter lending criteria and reserve ratios are needed. I would also favour higher duties on imported goods to make sure that the Kiwi price of cars and LCD TVs does not drop. Then use the revenue to fund much needed post oil infrastructure investment.
This is an incredible mess. The government needs to steal from the future to keep the debt payments current. The government is doing this by going further into debt. If this sounds vaguely familiar to American readers, it should, but it’s happening for different reasons.
Foreigners prop up the U.S. economy because it must be propped up. If it goes down, the curtain comes down on the whole show. (That doesn’t mean that it won’t come down. It just means that such an outcome will be fought tooth and nail along the way.) Foreigners are propping up the NZ economy because the government, by actually trying to cool things off by raising interest rates, makes the currency attractive to the international vampire class, looking to make easy money on their cash.
Just how necessary is that yen carry trade to keeping things going on a day to day basis? I don’t know, with any precision. Does anyone know? Someone must know. Right?
Why doesn’t the government borrow money from New Zealanders—instead of Japanese housewives—by drastically loweing or eliminating taxes on savings accounts designated for this purpose? (Don’t say Kiwisaver. HA) I look at the taxes on savings, and, well, I don’t blame most Kiwis for not saving anything. But do Kiwis know what people make on cash in other developed countries? Ouch.
How much sense does it make that some portion of those taxes on New Zealanders’ savings is being sent to Japanese housewives? Let’s keep it in the whÄnau. How?
As usual, I think substantial change in these policies will only occur once chaos sweeps the land and there are fewer BS appearances to maintain in “the market.”
@Kevin – Agree with all that also. Kiwisaver will be a joke. I keep as little money in my taxed Kiwi bank account as possible. Last I saw, NZ M3 was going up 18% a year. That is higher than most OECD nations, which are in the low teens, but lower than Russia which is around 40% annual M3 growth.
To stay even in NZ, one would have to get an after tax interest return of 18%. So even the disabled person on a benefit who pays no taxes needs a 18% saving account interest rate. If one is in the top 39% tax bracket (usually the people with the most savings potential) you would need a 29.5% interest return on your savings account. WTF! How likely is it that Kiwibank will offer savers that interest rate any time soon?
Meanwhile, the local housing bubble in my neighbourhood has just inflated another 12% compared to a year ago. So that is a painful real world data point even for people who don’t believe that M3 matters. Yeah, homeowners have to maintain their houses and pay property taxes, but the unrealized capital gains on their houses are tax free. Borrowing at 9% to buy something that has a tax sheltered appreciation of 12% a year (at the moment) looks like a pretty good deal to most people. Saving Kiwi dollars is very foolish, people are right not to save under these conditions. Meanwhile, I am making the same crappy wage as a year ago, falling farther and farther behind. This is quite depressing, and in dark moments I am actually beginning to consider going back to the US police state where my savings and labour will buy more.
@Alek: Where do you get the NZ M3 figures?
As an aside, I’ve been plotting the gold and silver price in both NZD and USD since about Feb 06 (I bought some gold and silver late 2005). Gold is cheaper now (in NZD) than it has been since March 2006. I bought it as a hedge against inflation and a falling NZD (!) Let’s just say that my net return has just bounced off break-even. I would have expected my gold in NZD to be roughly tracking inflation, not being beaten by my shitty savings account.
What does this mean? Is the NZD overvalued relative to gold? Are there not enough people (and money) treating gold as a store of value? Are evil illuminati bankers from the centre of the earth manipulating the gold market? Will I end up hungry and destitute, whoring myself on the streets to pay bandwidth bills?
I only know the answer to the last question.
Lots of interesting questions and suggestions being chucked into the mix.
I think that there are a few facts people need to be reminded about…
1. NZ has a current account deficit pushing towards the 10% mark versus gdp. this is despite record high dairy commodity prices.
2. Non-government debt levels are also into the red zone on a per capita basis.
3. Virtually all of NZ’s financial institutions and productive assets are overseas owned (esp. Australian, UK, US)
4. People who bought houses on the most recent wave of the real estate “boom” (i.e. since 2005) are roadkill if interest rates remain at current levels and imported inflation ramps up (petrol, other commodities)
With all of this in mind, I can’t see interest rates going down any time soon. Why? The yen carry trade seems to have devoured the NZ financial system whole, and is just waiting for an opportune moment to defecate it out the other end. If all the hot money decides the NZ dollar has been pumped for all its worth, they’ll move into dump phase, which will leave the debt markets in NZ in a shambles. anyone without extremely good access to off-shore refinancing might find themselves in big shit.
Anyway, as far as Bollard’s recent action is concerned, it was supposed to be a warning shot to the thieves in the pantry, but the burglars are hardly looking worried, now are they. Maybe because they’ve got all the big guns? HA!
@geofft
I had read the 18% NZ M3 growth from an article on financial sense a few months ago. (Some of their authors claim their measures of monetary growth are more accurate than government sources.) Your query motivated me to track down the latest official figures from the NZReserve Bank. Here is the official source:
http://www.rbnz.govt.nz/statistics/monfin/C3/data.html
April 2005: 151,484 April 2006: 168,018 April 2007: 192,556
So the current official report is M3 up 14.6 % this year
and up 10.9% the previous year. Two year monetary growth is 27.1%. (The period I have been working in NZ without any salary increase.) So maybe financial sense had it wrong, but NZ annual monetary growth is well into double digits and the rate of growth is accelerating. Certainly there is no great motivation to save NZ dollars that only pay 8% interest, which is then taxed.
Thanks Alek.
I’m going to retrofit my gold spreadsheet with monthly M3 so I can track our money supply growth.
I know what you mean about savings… All my interest falls into the top tax bracket, so my effective after-tax interest rate is only 4.4%. My salary increases about 2.5% per year, although that’s not guaranteed in any way.