* RBNZ Gov says NZ$ over-valued and unsustainable
* RBNZ could sell NZ$ if currency does not weaken
* High currency factor may slow future rate rises
(Recasts, adds details, quotes, updates market reaction)
By Gyles Beckford
WELLINGTON, May 7 New Zealand's central bank on
Tuesday warned that it may have to intervene to weaken the
country's high-flying currency, and suggested interest rate
hikes might be slowed if the kiwi dollar remains elevated.
The forthright comments by Reserve Bank of New Zealand
governor Graeme Wheeler sent the New Zealand dollar -- the 10th
most traded currency globally -- skidding nearly half a U.S.
cent, as markets adjusted to the prospect of a less aggressive
"If the currency remains high in the face of worsening
fundamentals, such as a continued weakening in export prices, it
would become more opportune for the Reserve Bank to intervene in
the currency market to sell New Zealand dollars," Wheeler said
in a speech to a dairy farming conference.
Wheeler said a stubbornly strong New Zealand dollar "will be
a factor in our assessment of the extent and speed with which
the Official Cash Rate needs to be raised."
Analysts were quick to note that the RBNZ has made similar
intervention warnings in the past, but the implications for
interest rates weren't lost on domestic markets.
"We do expect that sustained NZ dollar strength will slow
the tightening cycle this year," said ASB Bank chief economist
Nick Tuffley, who is picking another 25 basis point hike in
June. "But, beyond June, continued NZ dollar strength would
reinforce our view that the RBNZ would pause until the end of
Faced with rising inflation pressures in a booming economy,
the RBNZ started its long-awaited rate-tightening cycle in
March, becoming the first central bank in a developed economy to
raise rates. Wheeler's latest comments suggest the bank may not
apply the brakes too hard.
Another 25-basis-point hike at the June meeting would lift
the cash rate to 3.25 percent, following similar-sized hikes in
March and April, but a prolonged pause beyond that point would
leave rates much lower than the RBNZ's implied projection of
4.25 percent by year-end.
Analysts expect the central bank to lower its projection on
interest rates in June.
"Were the currency to hold at current levels, moving into
the June MPS forecast round, there would be scope for inflation
forecast downgrades, which should also cascade into the RBNZ's
rate track," JP Morgan senior economist Ben Jarman said in a
note to clients.
The kiwi, one of the 10 most traded currencies globally, has
been boosted by dairy export driven terms of trade at 40 year
highs, and the central bank's resumption of rate rises boosting
its yield attraction for investors in carry trades.
Currency carry traders borrow in countries with low interest
costs to fund purchases in markets with higher yields. At 3.00
percent New Zealand's rates are well above the Fed fund's rate
of 0.0 to 0.25 percent and even that of Australia which is at
The central bank's intervention arsenal is dwarfed by the
massive global currency trade, with more than 100 billion New
Zealand dollars traded daily -- meaning interest rates remain
the biggest tool to manage the kiwi.
The RBNZ has talked intervention in the past and
occasionally sold the currency in modest amounts, but Wheeler's
comments were his most assertive piece of jawboning since he
became governor in 2012.
"We are closer to intervention. It would not be a surprise
if they were to do it one day," said Westpac senior currency
strategist Imre Speizer.
"It's stronger rhetoric against the exchange rate than we
have seen from this governor yet."
Wheeler said the kiwi, which hit a two-and-a half year high
of $0.8779 on Tuesday, was overvalued and unsustainable
at current levels
He said the currency could be expected to weaken if the
Chinese economy were to slow, global dairy prices fall,
financial market volatility was to return, and the U.S. economy
The kiwi dropped to a low of $0.8700 from $0.8740. It last
traded at $0.8690. So far this year it has risen about 5.8
percent against the U.S. dollar, and in March a visiting IMF
team said it was overvalued by as much as 15 percent.
The RBNZ has regularly voiced its concern about the high
currency, but has also admitted that it's largely powerless to
affect the value other than at the margins, and that any
intervention would be to remind investors that the currency was
"not a one way bet".
A year ago, Wheeler made a similar sort of speech and
disclosed the RBNZ had sold the currency for the first time in
Dairy products provided about a third of the country's NZ$50
billion export earnings in the year to March, with China the
biggest buyer. But prices have fallen more than 20 percent over
the past two months, and the high currency remains a headwind to
A Reuters poll of 17 economists shows all but one expect the
RBNZ to raise rates to 3.25 percent in June, and though most
economists anticipate rates to rise to 3.75 percent by the end
of the year, Wheeler's comment puts the more aggressive market
forecasts in perspective.
The "dairy price dynamics are now bringing the currency into
sharper focus," JP Morgan's Jarman said, and that would feed
into a more modest interest rate tightening track.
(Editing by Shri Navaratnam)