The New Zealand dollar, otherwise
known as the Kiwi, is at the lowest level against the US dollar for five years.
This collapse has taken place over the past two months. The fall has been
unremitting and aggressive. So what brought it about?
The answer lies in a number of
places. For quite some time now the Reserve Bank of New Zealand (RBNZ) has been
concerned about the strength of the currency, which was driven up on the back
of interest rate differentials between the New Zealand rates and those of other
jurisdictions. The Kiwi is a long standing member of the group of currencies
that have been favoured by the Carry Trade, that group of investors who scour
the globe seeking jurisdictions that have a disparity in interest rates, so
that they can borrow at low interest and loan out at high rates. It is also a
commodity currency, where the country concerned makes most of its foreign
revenues from the export of one or more basic commodities.
The
mechanisms of the fall
The central bank has long tried to
talk down the exchange rate, because a strong NZD hurts exports. This was only
partially successful. Another way to lower the value of the currency would be
to reduce interest rates, but this would have a detrimental effect on house
prices in the cities, where investors, in particular, would borrow to purchase residential
property, and cause a bubble.
Now the global economy is coming to the
assistance of the New Zealander monetary authorities. Dairy produce prices are
falling on the back of increased international competition and cutbacks in
China, and dairy products are the most important export.
The Federal Reserve in the US has
signalled interest rate rises in the near future, which will reduce the Carry
Trade differential. The RBNZ has let it be known that is is not afraid to enter
the Forex market to sell NZ dollars, if all other measures do not work.
Then, to accelerate the tendency for
a fall, Gross Domestic Product figures for New Zealand have been much lower
than previously expected.
The end result of all of this is a
precipitate fall in the value of the Kiwi, which we have seen.
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