NZ dollar surges above RBNZ forecast on TWI basis, may prompt 'jawboning'

Friday 17th April 2015

The New Zealand dollar trade weighted index has soared above the Reserve Bank's projections to a nine month high but traders and strategists say the bank has few options, other than jawboning, to drive the currency lower in the face of stand out economic growth.

The TWI touched 80.08 this morning, its highest level since July last year when it touched a record 82.03. Last month, the central bank forecast the TWI to average 76.7 in the second quarter. It was recently at 79.78.

The central bank intervened in currency markets last August but may be loathe to use more reserves in another attempt, given the relative weakness of economies such as Australia's and the Euro region. So far this year, the New Zealand dollar has hit record highs against a weaker Aussie and euro, while its decline against the greenback has stalled as traders push back their expectations for higher US interest rates following softer economic data. Reserve Bank governor Graeme Wheeler, who has put monetary policy in neutral with a benchmark rate advantage over most major economies, has repeatedly called the kiwi unsustainably and unjustifiably high.

"They are between a rock and a hard place," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand. "Here at basically 80, you would have to think that the RBNZ would have to increase their rhetoric against the TWI."

While the higher currency is a boon for importers and kiwis travelling overseas, it makes the nation's exports less competitive and is likely to weigh on growth. Still, with the domestic economy expected to expand more than 3 percent over the next two years, and amid concerns about an overheated Auckland housing market, the Reserve Bank is constrained from cutting interest rates to lower the currency.

"The domestic economy is going well," said the ANZ's Tuck. Still, "the currency is providing quite a lot of restriction to the New Zealand export sector."

The kiwi's strength should eventually slow economic growth and justify lower interest rates but that point hasn't yet been reached, he said.

BusinessDesk.co.nz

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