The $NZ has risen strongly following the Reserve Bank of New Zealand’s (RBNZ) monetary policy statement on the 6th of December. This is in part due to the market’s interpretation that the new Governor of the RBNZ (Graeme Wheeler) is very focused upon inflation and less upon growth. A strong focus upon inflation relative to other central banks, including the US and Australian, means that our interest rates are likely to remain relatively high. Additionally, in contrast to the previous governor (Alan Bollard) Wheeler seemed less concerned about the high level of the $NZ. The combination of these factors gave currency traders increased confidence to buy the $NZ and take advantage of NZ’s higher interest rates.
Unfortunately this inflation focused policy and only using interest rates as a monetary policy tool is likely to lead to a higher $NZ and constrain economic growth as we export less and import more. Ultimately this may lead to the $NZ falling in the longer term. However, this may be too late if we have shifted jobs offshore.
Having a policy focused upon growth and inflation and using other policy tools such as currency intervention and controlling bank lending seems more sensible. This would help achieve some of the banks other stated objectives including financial stability and avoiding excessive economic volatility.
It is encouraging therefore that it appears the RBNZ has sold $NZ during November for the first time since early 2008. Whilst some believe this intervention has limited impact on the value of the $NZ if done in size we believe the action and the signal it sends can impact the level of the exchange rate and take out some of the volatility. It will be interesting to see if the RBNZ selling $NZ is continued and whether they use other policy tools such as restricting bank lending to help cool property prices in Auckland.
Jonathan Windust
Portfolio Manager