Why the New Zealand dollar fell to a one-year low today
US traders are arriving at their desks to see the New Zealand dollar down 1.4 cents to 0.7935 — the lowest since last September.
Two things drove the move:
- Broad US dollar strength
- An unscheduled statement on the kiwi from RBNZ Governor Graeme Wheeler
What did Wheeler say?
“The bank would welcome a move towards a more sustainable exchange-rate level … Unjustified and unsustainable are important considerations in assessing whether exchange-rate intervention is feasible.”
He added that the kiwi is susceptible to a “significant downward adjustment” over the coming six to nine months.
The thing is, it’s virtually the same statement he’s been saying all along.
RBNZ Governor Graeme Wheeler has a strong jawbone
In May:
“The Reserve Bank considers that the exchange rate is overvalued and does not believe its current level is sustainable,” Wheeler said. “It would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars” if the kiwi fails to respond to worsening fundamentals.
The June RBNZ statement:
“The exchange rate has not yet adjusted to weakening commodity prices, but is expected to do so. The Bank does not believe the exchange rate is sustainable at current levels.”
The July RBNZ statement (The big headline at that time was Wheeler announcing a pause in the rate hike cycle):
“The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall”
So what’s the difference today? First of all, Wheeler tied it all together a bit more nicely, noting the high rate and intervention at the same time. Second of all, it was an unscheduled statement and that gave it a sense of urgency.
What his comments do is prove the #1 rule about jawboning: It works best when you have momentum on your side. The New Zealand dollar has fallen about 8 cents in the past 3 months.
Wheeler has been teaching a master-class in jawboning while his counterpart across the ditch in Stevens flails blindly. For me it would be no surprise if Wheeler (who is known for his savvy in financial markets) looked at the NZD/USD and timed his comments to bust the last level of firm support before 77-cents.
NZDUSD – Was Wheeler watching this chart?
In hindsight, the market should have been listening a bit more closely on June 14, when the RBNZ’s McDermott said:
“The financial markets haven’t really moved the currency too much, yet its fundamentals have dropped a bit, and we really want them to focus on that point,” McDermott said. “We were trying to highlight that point. The FX market should be looking at this.”
NZD/USD was trading at 87-cents at the time. And that proves another rule: If you’re going to fight a central bank, don’t fight it for long.
