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Guest Commentary: Kiwis’ Unusual Currency War Battle Plan

Guest Commentary: Kiwis’ Unusual Currency War Battle Plan

2013-02-20 05:00:00
Yohay Elam, Technical Strategist

Japanese efforts to stimulate growth, fight deflation, and weaken the yen are in full focus of late, but similar efforts from New Zealand are distinctly different, though equally noteworthy.

In various instances, the Reserve Bank of New Zealand (RBNZ) has mentioned the stronger currency as a cause for worry, weighing on exports and endangering growth. Similar comments have come from central banks in Canada, Australia, and recently in the Eurozone. However, such complaints have their limits, and New Zealand easily qualifies as one of the four primary losers in the global “currency wars” (see the full list of losers on Forex Crunch).

Policymakers in New Zealand took a different approach, however. Finance minister Bill English had this to say:

“We’re not willing to take the kind of huge risks involved in large-scale speculation in the exchange rate with taxpayer dollars… To influence the exchange rate, you need a couple of hundred billion U.S. in the bank so they take you seriously. We’d be out in the war zone with a peashooter.”

This statement was a genuine acknowledgement of reality, but was it wise to release such a statement? NZDUSD continued climbing and reached a 17-month high, perhaps on the back of English adding fuel to the fire by way of his comments.

Yet on the other hand, this statement probably contributed to calming foreign investors. Asian (and other) investors who spend money in New Zealand will have less fear that authorities will act to weaken the currency and reduce the value of their investments.

Another interesting comment came from the head of the state: Prime Minister John Key stated that New Zealand consumers are better off from the higher NZD, because cheaper imports keep inflation down. Key’s statement may have been a common political attempt to put a positive spin on the situation, but regardless, it is undeniable that a strong currency curbs inflation.

The approach taken by Prime Minister Key is very different from that of Japanese officials, who see deflation as a big issue. For currency traders, this statement can be labeled as NZD bullish. (NZDUSD is one of the more predictable currency pairs, the list of which can be seen on Forex Crunch.)

By Yohay Elam of Forex Crunch

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.


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