New Zealand’s dollar is heading for a record low against the yen this year, as interest rate cuts in the South Pacific nation erode demand from investors who borrow cheaply in Japan’s currency.
The Reserve Bank of New Zealand turned the kiwi dollar into a favorite for the carry trade by maintaining the highest benchmark interest rate of any nation with the top credit rating from Moody’s Investors Service. As recently as June the gap between Japanese and New Zealand rates was 7.75 percentage points.
That gap has now more than halved, with Japan’s overnight cash rate at 0.1 percent and New Zealand’s official cash rate at 3.5 percent, down from 8.25 percent in July. New Zealand’s economy may be heading into its fifth quarter of contraction, the country’s Treasury department forecasts show, having shrunk by an average 0.3 percent in each of the first three quarters of 2008. For carry trade aficionados, the party is over.
Redemptions of uridashi and eurokiwi bonds, denominated in the kiwi dollar and sold to Japanese and European retail investors, outpaced new issues by 1.3 billion New Zealand dollars ($670 million) in January, according to Westpac Banking Corp. That marked the eighth month of net outflows from the debt, which is typically issued by banks and supranational bodies such as the World Bank.
New Zealand’s central bank has embarked on the steepest easing cycle since adopting its benchmark interest rate in 1999, and Reserve Bank governor Alan Bollard says there’s room for more cuts as the global economy falters. The worldwide financial and economic crisis has tested the nation’s inflation-targeting policy and prompted questions about whether central banks have a big enough tool kit for monetary policy. “We are a small, open economy, and we can’t fight against the tidal wave of economic bad news that is washing over the world,” Prime Minister John Key tells Institutional Investor. The former Merrill Lynch & Co. currency trader says central banks may need to do more to ease credit growth during boom times if they’re to retain control during a crash. “I think they also need to go away and look at asset bubbles,” Key says. “Eventually the bubble will burst — it’s just a question of how large it becomes.”
Consumer prices in New Zealand, which has a population of 4.3 million, fell 0.5 percent in the fourth quarter, cutting annual inflation to 3.4 percent from 5.1 percent in the third quarter, the highest in 18 years.
Economists predict the central bank’s key rate is headed to as low as 2.5 percent by midyear. Come December, the kiwi dollar may be buying as little as ¥32.8, from about ¥46.5 in February, according to Westpac — the lowest level since 1969.
The biggest test for the yen-kiwi cross-rate looms in July, when NZ$4.8 billion of the kiwi dollar bonds mature, the most since 1987; few new issues are penciled in. That suggests a spike in sales of New Zealand dollars to buy yen, driving the kiwi lower. “Maturities and redemptions will swamp new issuances,” says Khoon Goh, senior economist at ANZ National Bank, New Zealand’s largest lender. “What will those Japanese investors do? I suspect some of them will repatriate funds.” New Zealand’s current account deficit widened to a record NZ$15.5 billion, or 8.6 percent of gross domestic product in the 12 months ended September 30, as a weaker currency drove up import prices. Consumers have come to rely on overseas funds to finance home loans and spending, making the nation vulnerable to ructions in financial markets. Still, the nation’s trading banks aren’t heavily exposed to toxic mortgage-related securities and have managed to maintain credit lines, ensuring New Zealand doesn’t become an Iceland of the South Seas.
