New Zealand Dollar Hits New Highs

The Reserve Bank of New Zealand raised its benchmark rate to 8.00% on June 6^th, 2007.  The 25 point increase surprised markets and led to a general appreciation of the New Zealand dollar.  The Kiwi, the nickname for New Zealand’s currency, rose 0.7% yesterday against the US dollar to 75.56 cents.  Analysts predict another 0.5% rise today to 75.75.  These values represent 25 year highs for the Kiwi, the strongest the currency has traded since it began trading freely in March 1985. 

            The high interest rate in New Zealand has provided much of the impetus for the recent appreciation.  The last three successive quarters have seen interest rate point increases by the central bank.  After yesterday’s decision, the country now boasts the second-highest rates among AAA-rated countries, after Iceland.  The demand is being driven by carry traders borrowing one currency to buy Kiwis, and then trading back at the end.  The larger the difference that exists in rates between the two countries, the larger the profit potential for the carry trader.  As such, the New Zealand dollar, along with the Australian dollar, represents one of the most outstanding options for carry trading. 

            It is not only against the US dollar that the Kiwi has appreciated.  It also gained 0.7% against the Japanese yen, going from 91.65 yen from 90.68.  Cumulatively, the New Zealand dollar is up 29% against the yen, the largest currency pair appreciation among the sixteen most highly traded currencies.  Much of this had to do with the low interest rates in Japan—only 0.5% right now.  The low rate in Japan makes higher overseas returns very attractive for Japanese investors. Carry trading
 also contributes to this movement. 

            The Reserve Bank of New Zealand is not too happy with the currency appreciation, but the upward movement is not likely to end soon.  The currency is stable, and most traders expect at least one more rate hike this year.  According to the futures markets, there is a 30% chance that rate hike could come as soon as the next meeting of the Reserve Bank on July 26.  Bank Governor Allan Bollard claimed that high dairy prices forced the bank’s hand.  Continuing his hawkish tone, Bollard says, “The risks to domestic activity appear to remain on the upside,” signaling future rate hikes to combat inflationary pressures.  For now, the carry trade alone should keep the currency well-bid against both the yen and the US dollar, with support for the NZD/USD pair around 0.7500 levels.