Sometimes, currency strength can be a curse. Witness the New Zealand dollar, which set fresh yearly highs this week, creating more angst in Wellington as the country's policymakers worry about the kiwi's impact on New Zealand's vital export sector. The kiwi has gained strength largely as result of the rally in commodities and in sympathy with the Australian dollar, which has been setting post float record highs on a near daily basis this month.
Having risen to above $0.7800, the New Zealand dollar now stands within striking distance of the psychologically important $0.8000 level and some market players are beginning to wonder if the Reserve Bank of New Zealand (RBNZ) will be forced to intervene to temper its rally.
In March 2005, the RBNZ published a list of four criteria for considering foreign exchange market intervention: the exchange rate must be exceptionally high, or exceptionally low; the exchange rate must be unjustified by economic fundamentals; intervention must be consistent with the policy targets agreement; and conditions in markets must be opportune and allow intervention a fair chance of success.
Therefore, if the kiwi continues to climb, the RBNZ may have good reasons to consider intervention. The unit has been pumped up by nothing more than general investor enthusiasm for commodity dollars. In reality, New Zealand's economy is quite shaky. Unemployment has actually increased, GDP growth has been anaemic, while both business and consumer sentiment surveys have deteriorated markedly. Furthermore, in order to ease monetary conditions in the aftermath of the devastating earthquake in Christchurch, the country's second largest city, the RBNZ recently lowered interest rates by 25 basis points to 2.5 per cent - hardly a bullish sign for the currency. In short, there has been no economic justification for the rally in kiwi-dollar. Up to now, New Zealand monetary authorities have been reluctant to engage the market. However, if today's New Zealand Business PMI data slips below the 50 boom/bust level for the first time in four months, while the unit continues to inch towards the $0.8000 figure, expect the RBNZ to sound the alarm relatively soon.