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Wheeler tells manufacturers why he can't help the dollar

There is little the Reserve Bank can do to bring the New Zealand exchange rate down, governor Graeme Wheeler says.

This afternoon Mr Wheeler told Auckland manufacturers intervention in the currency is difficult and only likely to be successful under certain circumstances.

He also says lowering the official cash rate – as some business groups have urged – would not necessarily have any impact on the currency. The kiwi dropped half a US cent after release of the speech.

“Since late 2010 the Reserve Bank of Australia has cut its official cash rate by 1.75% to its current level of 3% without significant impact on the Australian dollar.

“The yen appreciated by over 30 between February 2007 and November 2012, a period where the target rate was lowered from 0.5% to a range of 0.1% to 0%. The Swiss franc appreciated by about 20% between January 2010 and July 2011; despite the central banks target interest rate range between zero and 0.75%.

Intervention is possible but is likely to produce only short-term relief, he says.

The Reserve Bank has four criteria for effective intervention: the rate has to be at an exceptional level; the level has to be not justified; any intervention has to be consistent with monetary policy (i.e., not inflationary) and there have to be market conditions which would make such an intervention successful.

“The last factor is particularly important. Globally, exchange rate turnover is in the range of $US4 trillion to $US5 trillion a day.

"Band of International Settlements surveys suggest the Kiwi is about the tenth most traded currency in the world with daily turnover of spot and forward transactions totalling around $US27 billion in April 2010 (the latest BIS survey).

“The Reserve Bank is prepared to intervene to influence the Kiwi. But given the strength of recent capital flows, we can only attempt to smooth the peaks of the USD/NZD exchange rate; we cannot determine the level.

“When the NZ dollar is coming under upward pressure, we want investors to know that the Kiwi is not a one way bet.”

Fashionable policy

That leaves the fashionable policy nostrum of quantitative easing or printing money.

That has been used by countries with interest rates at almost zero yet still faced by households and firms unwilling to expand and holding high debt levels they wished to reduce.

“Quantitative easing aims to stimulate wealth effects in the economy by increasing liquid balances and generating higher prices for equities and financial and real assets. It’s also designed to raise bank profitability as a means of strengthening banks’ capital positions.

“And it was hoped that higher bank capital, through retained income and capital injections, would lead to additional bank lending to corporates, and especially credit constrained small and medium sized enterprises and households – at a time when many were reducing their leverage.”

It is not clear this has actually worked, he says.

“The intention was to encourage borrowing and investment by entrepreneurs, businesses and individuals, not financial intermediaries. On this, the evidence has been flimsy at best.”

In any case New Zealand is not in the position of countries, which have adopted quantitative easing.

“New Zealand did not experience this type of economic damage and quantitative easing, together with its precursor of very low interest rates, is not justified in the New Zealand situation.

"Our economic challenges are different from the US, Euro area, and Japan, and quantitative easing would increase inflation, raise inflation expectations, stimulate asset prices, and lead eventually to higher interest rates.”

A further idea gaining traction is emulating the Swiss example and “capping” the exchange rate at a certain level by purchasing foreign exchange in what amounted to unlimited quantitates so as to hold the currency at a certain level.

That would be “risky” for New Zealand, Mr Wheeler says.

Firstly, the Reserve Bank’s official cash rate (OCR) – currently at 2.5% – would need to drop to zero, so as to stop currency traders taking advantage of the interest rate arbitrage.

“Any attempt to retain non-zero interest rates by 'sterilising' such massive intervention would be very difficult. In effect therefore, a Swiss type operation to cap the value of the NZ dollar through large scale FX intervention would also amount to quantitative easing.

“As I mentioned, this would be highly inflationary in the NZ context.”

More by Rob Hosking

Comments and questions


To compare Australia in 2010 when they were in a mining boom to NZ is nonsense. His argument is unconvincing and he doesn't sound convinced himself

You sound like a short Kiwi FX dealer!

No, I am not short Kiwi dollars

Just more interested in increasing export value than buying a cheaper LCD TV or car. I kind of think that would be a better result for the economy. There is no doubt the Kiwi dollar is overvalued - no one is disputing that.

Wheeler also says "lowering the official cash rate – as some business groups have urged – would not NECESSARILLY have any impact on the currency".

Which means its a 50/50 bet to lower the OCR. Isn't that a better bet than letting the currency stay up here or increase further?

Since when did NECESSARILY = 50/50

I do a lot of math but have yet to see the proof for this. Could you provide me a link to a respected journal?

I'm going to jump to a conclusion that your doctorate is not in math or economics.


If you read it a bit more carefully you might have spotted he said since 2010 to today.

In my view to compare the Australian economy to ours over that period is ridiculous.

Australia is also a safe haven in the international currency markets so if Europe and/or the USA are looking weak - Australia gets flooded with cash - compared to the dribbles that are invested here - hence the currency appreciation despite the lowering of interest rates in Australia - their interest rates are still high compared to the USA, UK and Europe.

In general, the AUD and NZD are traded as a pair due to their high correlation and underlying fundamentals. Proportional to economy size the NZD is more highly traded than the AUD (in fact CHF is the only currency with a higher turnover/GDP ratio).

Aussie is far from a safe haven, t-bills and gold are safe havens.

Also a boom in mining (~15% of GDP I think) isn't that different to a boom in another commodity (dairy) in NZ. Australia has more than mines, just like we have more than cows.

The Doctor is right.

The governor is saying that dropping the official cash rate won't necessarily bring the dollar down but it also may make sure it doesn't appreciate any further.

Sitting on his bum isn't the answer, either.

Now, Russell, play nice!

At last, a clear and simple explanation. Now will Dr Norman (Just goes to show what a PhD is worth) et al please shut up!

In political science, yes, I would agree with you. Furthermore, it falls far short of any type of a qualification that qualifies him to speak on economic matters, including monetary policy and the exchange rate.

But hey, that's the Greens. Whenever did they need to be expert or learned about a subject before they start running their mouths about it to all and sundry and how you will live life under the boot of their fascism.

Doctor - happy that you don't give your name but love to see a list of your qualifications to show me that you know more than the governor of the RBNZ on the subject. Can you also detail the research you've done on the matter that outweighs the RBNZ, otherwise many people may possibly think you're yet another one full of hot air.

Are you for real? Considering the mess that Central banks and their supposidly smart governors/chairmen have made of the global financial system in the last 10 years why an earth would you kow-tow to their presumed intellectual prowess? The evidence of the last 10 years is that those running the global financial system have been asleep at the wheel and yet you want to tell us how formidable they are? Why an earth would you defend the status quo when the status quo has manifestly failed?

You're both right. The status quo is failing and we need to get it sorted. However, it will have to be the RBNZ to do it - not your sideline economist or financial commentator.

Translation for Norman and Shearer...

Printing money to get out of debt won't work and the resulting inflation will make staples like bread and milk far, far more expensive. Petrol will well over $5 litre... And we all will need million dollar notes to for the weekly groceries.

Maybe with his PhD, he could also briefly study Economics 101 for dummies also... Just so he can appear semi-literate on financial matters...

How goes those details on the 10,000 $350K homes?

Petrol over $5 a litre. You've hit the nail on the head for the Greens true motivation.

The new governor gets it. Thank goodness. We are peeing in the wind daily trading if we think we can affect things, and if we think we won't get hurt.

"Bank of International Settlements surveys suggest the kiwi is about the tenth most traded currency in the world with daily turnover of spot and forward transactions totalling around $US27 billion ... "

Doesn't this worry anyone? Our economy is tiny to be trying to deal with these sizes of purely speculative flows that are obviously highly disruptive our trading patterns and economic decisions, short and long term.

Maybe a tax on banks that speculate with the kiwi dollar is warranted until this rampant gambling that is gutting the economy can be brought under control?

You are assuming all these banks are are domiciled in NZ and liable for NZ tax. That is not the case.

There's also two massive assumptions - the spot turnover, which is actual trades, is going to be a fraction of that $27b. Fwds, Futures and other Derivatives make up the bulk of that and don't actually reflect real trades.

Further, and I hate that few people get this, is that being highly traded is a good thing. It increases liquidity, reduces margins. All this 'cash flooding into New Zealand' - mate, it's here because someone is asking for it. If there's too much, interest rates would fall and conversely if we were short of capital.

Somehow correlating Fx turnover to the dollar being overvalued is wrong. Saying that the dollar is 'overvalued' is wrong - it can never be over- or under-valued - you can only make that statement relative to something else, like prices, or interest rates, or some fundamental measure. But then, all of that ignores that an fx rate is not regressive or deterministic... Jee.

If the dollar were so strong, then billions of our/and foreigners' money would be flowing out to buy yen and euros, right. Billions flow in and out daily. Interventions don't work, and risk tens of billions of taxpayer funds, risk inflation and damage a myriad of financial relations which, in turn, damage our economy. Next time round, the dollar will be 'too low', manufacturers will say it isn't, and consumers will have a cry. Pulling a Venezuela, or an Argentina, each time this happens is looney.

Wheeler could make suggestions to government about policy such as borrowing a billion a month to pay welfare. I suppose he has to keep his mouth shut.

Intervention by RBNZ would be a waste of time and taxpayer money. It's like a magnet to everyone to take them on and with a war chest of $10 billion it won't last long.

Just ask the BOE vis a vis Soros in 1992 what a fruitless exercise that was. I should know as I was doing GBP in Tokyo at the time.

The best bit of intervention to get your currency down is for a PM or minister of Finance to do a Keating - we are turning into a banana republic. Result, AUD/USD drops 5 cents in a matter of hours despite the RBA being a buyer of last resort for many Ozzie banks.

Great to see we have a Reserve Bank govenor who can communicate the arguments and justification to most, and he certainly knows his stuff.

Global investors and FX traders makes bets on financial outcomes, and they don't aim to loose. The currency is a weighting measure of one economy to another, and on balance it's the differential between the many countries' GDP that dictates what relative changes will occur in the currency.

Even though the Christchurch earthquake was a disaster in human terms it has/will put a floor under NZ's GDP growth for quite some time, and with our GDP growing at a rate above that of America will result in the value of the $kiwi to climb. Almost any attempt to force the exchange rate to reduce in a meaningful way will be met by large investors/gamblers who have more financial clout than the entire NZ economy, and they will bet and bet until the Reserve Bank/government blinks. The cost to all NZers would be huge.

The Doctor, Norman, Shearer et al will be happy to make Wheeler change, but when the wheels fall off they will blame everyone else. I'd much rather bet on Wheeler and be where our economy is now than have the unemployment and social issues facing the USA, Spain, Portugal, Greece, Ireland, UK, etc. 50% to 60% youth unemployed even amongst those who want to work, governments that don't have workable budgets, financial oligarchs who dictate how countries are run, tax regimes that are avoided in a cash black market, VAT of over 20% - the list goes on.

We don't get paid the most in NZ, and that is largely the result of our attitude to work and is in our own hands and is fixable. We have a wonderful country in the temperate region of the world free of most dangers. Glad to be a Kiwi.

Well said, thank you. In particular, "we don't get paid the most in NZ, and that is largely the result of our attitude to work and is in our own hands and is fixable".

I would add that activist movement in NZ is largely to blame as well through its perpetuating of anti-development and anti-progress propaganda. We yearn for higher incomes, etc, but have been told by these groups that its comes at a cost too great. We've bought it, and now even the public jumps at any opportunity to stab 'evil' corporations, 'corrupt' politicians, destroyers of the environment, and believe that everything is a rort. That's what you need to fix...

The exporters can move to ireland then - I for one do not wish to pay even more for my groceries( 95% of our food is now imported) as well as the cost of living going up - who wants a weak currency in this global climate?

Jo, according to a report produced by the Reserve Bank of Australia it suggests a 10% fall in the exchange rate only amounts to around a 1% increase in consumer prices, see more here: