Divyang Shah, Senior IFR Strategist
The old tool was a return to FX intervention on the NZD, which the bank sees as “significantly overvalued.” The new tool comes in the form of macro-prudential measures, starting with higher risk weighting for new high LVR (loan-to-value) loans.
In a currency war environment, the objective is to find other levers to pull instead of interest rates. For the RBNZ, trying to deal with its exuberant property market through interest rates could make the NZD even more overvalued.
So expect a significant reliance on macro-prudential measures to try and take the heat off the property market once the necessary paperwork (MoU) has been agreed with the finance ministry.
This reliance on macro-prudential tools is a substitute for standard monetary policy and offers a more targeted approach. With official rates at 2.50%, NZ rates still offer a significant amount of carry for markets searching for yield and flush with liquidity. The RBNZ has confirmed it intervened in the market but it does not want to raise expectations, with Governor Wheeler saying “intervention will not materially change the level of the exchange rate but could take potentially the tops off rallies”.
The RBNZ’s actions are important for two reasons:
1) the RBNZ is in the same boat as other central banks dealing with strong safe-haven currencies by focusing more on their macro-prudential toolkits, and
2) FX intervention suggests a certain desperation because it is being done even as success is not guaranteed.
The irony for the RBNZ is that intervention suggests the potential for more NZD upside over the next month. When the RBNZ last intervened in July 2007, the NZD subsequently appreciated close to 5% over the next month and 8% before the rally abruptly ended due to the onset of the financial crisis in 2007.
A one-month 0.85 NZD call/USD put has a theoretical cost of around 41 pips on FENICS (0.485%) and would help to protect against the uncertainty over RBNZ FX intervention strategy while remaining positive on the NZD.
New Zealand Dollar trade weighted index - nominal
