Asian Currency Intervention

The Reserve Bank of New Zealand intervened in the foreign exchange market on the morning of Monday, June 11, 2007.  The central bank felt that the currency was at an unreasonable high level. So it used a taxpayer-supported fund to sell the New Zealand dollar in the foreign exchange market.  The Kiwi fell 100 points in early morning trading as a result of this action.  The currency had risen in recent days to a 25-year high against the dollar and a 17-year high against the yen on the back of a surprise rate hike by the RBNZ on June 7.  The hike, and the hawkish comments that accompanied the hike, moved the Kiwi to a level that the bank found dangerous.  Today’s comments characterized last week’s highs as “exceptional and unjustified in terms of economic fundamentals.”  In New Zealand’s export-driven economy, the unreasonably strong currency was starting to put an check on economic growth.  Early reports estimate that the RBNZ spent about 120 million US dollars intervening in the foreign exchange market.  There is strong precedent in Asia of active intervention in the curry market by central banks.   As such, this morning’s actions should serve their purpose of weakening the Kiwi (at the very least, the bank’s actions demonstrate the upward limit that the RBNZ will allow for the Kiwi to appreciate). 

            The RBNZ’s forex market intervention will have wider market repercussions as well.  Because of the large borrowing rate differential between New Zealand and Japan (8.00% to 0.5%), this currency pair has seen rampant carry-trading.  The Japanese carry trades have had a substantial influence on trading markets generally, with yen borrowing as a primary vehicle for foreign investment in the US equities market.  But this RBNZ intervention this morning could cut into carry trading momentum.  If the forex market follows with the talk of the New Zealand central bank push to depreciate the Kiwi (and it has a history of moving with the bank), then that would be a minus for carry trade and a positive for the yen.  The risk of carry trade unwinding is not as much of a concern as it could be.  There is a sense that the Japanese market could sustain the natural tightening that a stronger currency would inflict on an export-driven economy.  The important thing is to watch out for the larger implication of this Asian currency intervention, not just its direct effect on the Kiwi.