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NZD strength attributed to hedge funds
Of the world’s 16 major currencies, the New Zealand Dollar (NZD) has been the best performer over the last couple months, having appreciated 10% since July. The strength of the Kiwi has baffled central bankers, who have been unable to connect the currency’s rise to any economic or technical indicators. Their only explanation is that hedge funds have piled into the Kiwi, in search of an attractive, relatively stable return. Hedge funds would use the carry trade technique to short low-yielding currencies and use the proceeds to purchase New Zealand short-term debt, which is currently yielding 7.25%. However, the Central Bank urges caution, insisting that the Kiwi could suffer a collapse at any moment. Bloomberg News reports:
“The assumption certainly of the Reserve Bank and which I share is that the medium-term trend in the New Zealand dollar is down.”
Read More: Cullen Says Hedge Funds May Be Behind New Zealand Dollar Surge
http://www.bloomberg.com/apps/news?pid=20601081&sid=azmMtUTqO17c&refer=australia
Cullen Says Hedge Funds May Be Behind New Zealand Dollar Surge
By Matthew Brockett
Sept. 27 (Bloomberg) -- Finance Minister Michael Cullen said hedge funds may be pushing up the New Zealand dollar, raising the risk of a sharper drop in the exchange rate when they sell.
Hedge funds appear to be ``taking short-term positions'' in the dollar to take advantage if New Zealand's relatively high interest rates and ``betting they can get out in time and not lose'' when the currency declines, Cullen said in an interview in London yesterday. Investors shouldn't forget the dollar had dropped below 40 U.S. cents in the past and ``would be unwise to bet that that couldn't happen again.''
New Zealand's dollar has risen 10 percent since the start of July, the best performer of 16 major currencies tracked by Bloomberg. It reached a seven-month high of 67.24 U.S. cents yesterday on speculation overseas investors will continued to be lured by New Zealand's interest rates.
Reserve Bank Governor Alan Bollard on Sept. 14 kept the benchmark interest rate at a record 7.25 percent and said he is unlikely to lower borrowing costs ``for a considerable time'' because of the outlook for inflation. The central bank wants to shift economic growth toward exports and away from domestic spending and the housing market, which is a source of inflation.
Cullen said though the resurgent dollar ``does place at risk'' a pickup in exports, he doesn't expect the Reserve Bank to intervene in currency markets to halt the currency's appreciation.
No Intervention
``There's not a lot we can do because clearly we don't intervene and try to push down the dollar,'' he said. ``That's the domain of the Reserve Bank but I can't see the Reserve Bank doing that in this particular situation.''
The dollar has gained even after a government report on Sept. 21 showed New Zealand's current-account deficit widened to a record NZ$15.15 billion ($10 billion), or 9.7 percent of gross domestic product, in the year ended June 30.
Cullen said the dollar's gains are ``difficult to understand'' given New Zealand is ``sitting on a current-account deficit of nearly 10 percent of GDP.
He said the currency started rising in the weeks before Bollard's latest monetary policy statement. While there is no data to show whether hedge funds have increased their New Zealand dollar positions, Cullen said he suspected the funds are behind the dollar's appreciation because most factors suggest the dollar should decline.
``The assumption certainly of the Reserve Bank and which I share is that the medium-term trend in the New Zealand dollar is down.''
Hedge funds, loosely-regulated pools of capital catering to wealthy investors and institutions, bet on movements in asset prices to make money. They sometimes invest enough to move financial markets, most famously illustrated by billionaire George Soros's bet in 1992 that the U.K. would pull out of the European Monetary System, triggering a 20 percent plunge in the pound. Soros made $1 billion for his Quantum fund on the wager.
Bank Indonesia said this week that foreign investors have bought $7 billion in stocks, treasury bonds and central bank bills as ``short-term'' investments and it expects some of that to be withdrawn as the central bank cuts interest rates.
To contact the reporter on this story: Matthew Brockett in London at mbrockett1@bloomberg.net .
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