Category — Money

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. 

Have you heard the expression “Money changes people”? The saying implies that people’s behaviors and attitude towards society change as they come into possession of large amounts of money. Now according to an article from SeattlePI.com, just SEEING money can alter people’s behaviors. Several experiments were conducted to see the affect of people who were exposed to seeing money versus those who were not. The results were that people who were exposed to money became more self-sufficient and less social.

“The underlying idea is that at some point early on in human evolution everyone probably needed someone else to help them achieve their goals,” whether building a home or catching food. Eventually systems of exchange came along, and then money, which could be exchanged for things, allowing people to pursue their own aims without the aid of others. So, over time, people with money didn’t need other people so much.”

In one experiment conducted, 61 students at the University of British Columbia were asked to fill out questionaires. Some of the students sat in front of a poster showing money, sat in front of a poster that showed flowers, and the others sat in front of a poster that showed a seascape. The students were then asked to choose between different recreational activities that were categorized into group or individual events. The results showed that students who were looking at the money were more likely to choose individual activities.

Another test had students unscramble a set of letters into words. The words fell into two groups, one that involved money and one that did not. The students were then asked to solve a puzzle and told to ask for help if needed. Those who unscrambled the words that involved money, waited almost twice as long to ask for help versus those whose words were random.

“Subjects exposed to the idea of money subsequently show more self-reliant but also a more self-centered approach to problem-solving than subjects exposed to neutral concepts,” said Carole B. Burgoyne and Stephen E. G. Lee of the University of Exeter in England.