RBNZ chief stated that they are considering intervention to lower NZD exchange rate. In the same day, the RBA chief also stated that the current AUD is not good for Australia.

One of the hottest news piece in the market last week (26/9) was Reserve Bank of New Zealand (RBNZ) chief, Graeme Wheeler, statement that they are considering intervention to lower NZD exchange rate that has gotten too high. In the same day, Reserve Bank of Australia (RBA) chief, Glenn Stevens, also stated that the current AUD is not good for Australia. While US The Fed and UK's BOE are wondering when to hike their interest rate, RBNZ and RBA are seeking ways to shoot down their currency exchange rate.

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Exchange Rate Vs Property Bubble

Strong Australian Dollar has put RBA in a dilemma due to the suspicion that property market has overheated.

RBA has kept interest rate unchanged at 2.5% in the last year. The low rate, it seems, has created unbalanced housing market and mortgages, as well as increases the risk of property bubble. This is not mere speculation, as the latest report on Australian financial stability published by the RBA noted the precarious state of Australian housing market.

In order to cool down the overheated market, the easiest solution might be to rise borrowing rate. However, Australian Dollar exchange rate according to RBA now is already too high, and if borrowing rate is hiked, then there are risk that the bad impact of strong exchange rate might be too much for Australian economy. In the circumstances, Glenn Stevens touched upon the possibility to use macroprudential policy in solving the problem of overheated property market, while keeping borrowing rate at current low level.

Glenn
In RBA statement this month, the Australian central bank valued the current Australian Dollar exchange rate as higher than its fundamental value and that the most prudent course will probably be a period of stability in interest rates. Since 2013, Stevens has repeatedly jawboning the Australian Dollar. If there is one thing we could say about RBA, it is that they love weak AUD best. Everytime AUD showed signs of recovery, Stevens almost certainly said something that brought it down.

RBA did not explicitly say how much is too much and how much is enough, and therefore analyst pointed out to different levels. Sidney Morning Herald quoted Wontark Doh from Samsung Asset Management that said he stayed away from Australian bonds and currency and will consider buying if AUD weakens to 0.88, while Roger Bridges from Nikko Asset Management Australia thought that the current AUD sellof is out of whack and that should have ended by now. Meanwhile, Boris Schlossberg from BK Asset Management agreed that AUD have oversold, and there could be a short covering, but mentioned that if price moves up to 0.90, then selloff will be popular again.

What RBA could do to drive the Australian Dollar lower? Beside of the good old jawboning, there are various means to do that. Another alternative is to directly intervene on the currency exchange rate as Graeme Wheeler from RBNZ did.

 

Because Of Milk And Cheese

The words that Wheeler chose to describe the New Zealand Dollar exchange rate in his speech yesterday was unjustified and unsustainable.

As an export-based country, NZD exchange rate should have went down along with the sharp decline of commodity prices this year. Price of dairy that has became New Zealand main export has dropped 45% since February 2014, but in the same period NZD has went up as much as 1%. Beside of that, the risk that stemmed from China and the strong US recovery has made New Zealand Dollar vulnerable. Quoted by Sidney Morning Herald, Wheeler said, In the Reserve Bank's view, the combination of these factors makes the New Zealand dollar susceptible to a significant downward adjustment over the coming six to nine months.

In a previous editorial back in March, we have talked about some possible reason why central bank might dislike strong currency exchange rate. At the time, ECB and RBA leader were busy jawboning their currency. One of the reason is because a strong currency prevent the country's products to compete at the same price with other countries that own weaker currency. The dilemma is getting thicker in Australia as well as New Zealand, in relation with cheaper dairy prices.

Produk
The fall of dairy prices made it possible for milk, cheese, and butter, to be sold at low price. With such price, producers of the same goods from countries with weak currency will gain advantage over New Zealand's. The fall of dairy prices threaten New Zealand dairy industry due to the fall in revenue. It was just the week before that Fonterra, the biggest dairy producer in New Zealand, reportedly trimmed its payment projections for New Zealand dairy farmer. This is a serious red light, because dairy products account for the highest portion of New Zealand total exports.

In order to resolve the problem, one of the efforts done by the country is by depreciating its currency. One of the ways to do that, beside of jawboning, is through direct intervention by selling off NZD. The increase of supply in the market is hoped to drag NZD exchange rate down to a much more stable level and support the country's economic growth. At the time, the RBNZ had yet announced any details, but this morning, it emerged that RBNZ had intervened in August by selling off $521 million. It was the highest number of NZD selloff done by the central bank since 2008. However, the RBNZ has not said at which level they consider the NZD exchange rate to be justified and sustainable.

RBNZData of RBNZ Intervention
(Source: Westpac)

 

Exchange Rate Targeting

The RBA and RBNZ policy that were purposefully targeting exchange rate has caused AUDUSD and NZDUSD to skydive at times when US Dollar is at its strongest. As the result, AUDUSD and NZDUSD has break through several important support levels and currently is oversold. The circumstances made it susceptible to reversals, especially because there are significant gap between Australia and New Zealand interest rate compared to US the Fed rate which made AUDUSD and NZDUSD ripe for carry trade. However, due to the central banks point of view, any pullback must be limited and might even be the stepping stone to fall further downward.

It needs to be noted that although weak currency is not good, but so do overly strong currency, particularly for countries that rely on exports. Therefore, the way the USD went from strong to stronger these days has made us quite uneasy. Similarly, weaker currency will benefit the Eurozone in the current economic decline. As such, central bank chiefs everywhere might utilize their power anytime to jawbone their currencies, if it is considered beneficial for the benefit of the economy.