By Bernard Hickey
Prime Minister John Key has indicated he thinks the New Zealand dollar's fair falue was around 65 USc and that it would be logical for the Reserve Bank to intervene to push the New Zealand dollar lower, given it was currently well above where it was fundamentally fairly valued.
Key made the comments to reporters in Parliament after announcing a supply and confidence agreement with ACT MP David Seymour.
Key was asked about the prospect of Reserve Bank intervention after Governor Graeme Wheeler issued an unusually long and detailed statement on Thursday afternoon saying why the currency was at an unjustified, unsustainable and extremely high level. The comments were seen as a warning of intervention.
Financial markets were closely watching the Reserve Bank for its 3 pm release of its currency reserves data at 3 pm today to show whether or not it intervened in August. The Reserve Bank subsequently disclosed it sold a net NZ$521 million on a trade basis during August, which constituted substantial intervention. The bank's net open foreign currency position rose NZ$547 million to NZ$3.110 billion of foreign currency reserves.
Key was asked what he thought was a fair level for the New Zealand dollar, and he said the 'Goldilocks' level of being not too high or too low was around 65 USc.
However, he said he was not aware if the Reserve Bank had intervened, adding he expected any notice would be given to Finance Minister Bill English.
Key restated his view that currency intervention was not effective in the long term to try to shift the underlying value of the currency, but agreed it was "fairly logical" for the Reserve Bank to intervene when the currency was so far away from its fundamental value.
Key was asked in an early afternoon news conference if he would be comfortable if the Reserve Bank data showed it had intervened.
"The Reserve Bank Act always allows the Reserve Bank to intervene at times where they believe the currency is out of balance or significantly over or undervalued. My experience of the Reserve Bank ever since they've had that authority is they've acted very cautiously and wisely in doing so," Key said.
"I happen to actually support the view that the Governor has that the exchange rate is over-valued, so if they have intervened, that would be a matter for them, but it would seem fairly logical," he said.
"At the levels we're at -- 78 odd cents -- it's at quite high levels. It's worth remembering the New Zealand dollar floated at roughly 44 USc so we're a long way from that," he said.
'Goldilocks level'
Asked what was fair value, he said: "In the end the Goldilocks rate -- not to high, not too low, just about right -- I don't know, 65 USc maybe -- lower than it is today."
Key went on to say that one reason the New Zealand economy got through the 2009/10/11 period was that the New Zealand dollar was relatively competitive against the Australian dollar.
"Exchange rates are very real in terms of the impact they have on exporters, and therefore on job creation," he said.
He was then asked if he was comfortable with the Reserve Bank spending billions of dollars intervening in the currency market if it was deemed necessary.
"I've never been of the view that currency intervention as a way of essentially turning around an exchange rate and acting against the fundamentals will be successful, because the long term analysis of that doesn't support the view that it works. What does work though is targeted interventions at times where the currency is either over-performing or under-performing, and that will be the basis for their action, if they've acted."
Key said he hadn't been briefed by the Reserve Bank about any intervention, but that any briefing would be to Finance Minister Bill English.
(Updated with more quotes from news conference, subsequent Reserve Bank confirmation of intervention)
13 Comments
So if the government debt is denominated in other currencies we will have to pay back a whole lot more. Then the private debt has to be paid too and the tax take falls.
Nice one JK. Best of luck with your next three years. OK you have Dunne as your little helper. Give him back his Minister of Revenue, you need a fall guy.
FYI updated with the Reserve Bank's subsequently disclosure it sold a net NZ$521 million on a trade basis during August, which constituted substantial intervention. The bank's net open foreign currency position rose NZ$547 million to NZ$3.110 billion of foreign currency reserves.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.