Kiwi dollar strength still 'unjustified and unsustainable', RBNZ's Wheeler says

Thursday 11th September 2014

The New Zealand's dollar persistent strength is still "unjustified and unsustainable" after a slump in commodity prices this year, though it should come down as the US Federal Reserve moves away from running a zero interest rate policy, according to Reserve Bank governor Graeme Wheeler.

Wheeler kept up his heightened rhetoric in trying to jawbone the kiwi, having spooked markets in July when he called its strength "unjustified", an explicit requirement in the central bank's policy to intervene in foreign exchange markets. The strong currency, while keeping a lid on imported inflation and strengthening the buying power of consumers, is seen as a headwind on the economy by eroding the value of the nation's exports.

The kiwi fell below 82 US cents for the first time in seven months following the comments, touching a low of 81.74 cents. It recently traded at 82.06 US cents and was 78.61 on the trade-weighted index.

"The exchange rate has yet to materially adjust to the lower commodity prices. Its current level remains unjustified and unsustainable," Wheeler said in a statement. "We expect a further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise."

The kiwi has been a favourite among investors as New Zealand's high interest rates relative to its peers attracts buyers seeking a bigger return on their investment in a global setting where near-zero interest rates are the norm among the major economies.

The local currency has since eased back from its post-float high on a trade-weighted basis in July after Wheeler ramped up his attempts to talk down the currency, and traders speculated the central bank had been active in the market late last month.

The Reserve Bank trimmed its projection for the trade-weighted index by 100 basis points in the September monetary policy statement, seeing it fall to an average 78.4 over the December quarter and dropping to 75.8 by the end of next year. It had previously projected the TWI holding at 79 through the remainder of the year, before falling to 76.9 in 2015.

The bank said the currency's decline was for a number of reasons, including lower expectations for future interest rate hikes due to tamer inflation and falling dairy prices, and as the US dollar appreciated on growing anticipation the Fed will start raising interest rates earlier and faster than expected.

BusinessDesk.co.nz

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