Friday, September 10, 2010
Vital Statistics
23 Aug 2007
What will happen to the exchange rate next?
During the past three months, the NZ$ has gone through five phases. Firstly, there was a steady rise in the TWI during March-April from 67.8 to 72.1 just before the OCR review on April 26. Secondly, it trended slightly downwards to 71 at the end of May. Thirdly, there was a sharp upward shift in the lead up to the June 7 review to 73.1. Fourthly, there were further rises to see the TWI at 74.1 by June 11. The fifth phase, following the Reserve Bank’s intervention, has brought it down close to 73 as we go to press.
It is early days yet for the full impact of the Bank’s willingness to intervene to be absorbed by the market. We have previously asserted that the Bank’s clean float policy was partly responsible for the elevated status of the NZ$. On that basis we would expect its abandonment to lead to a significant fall once the market is sure that the recent intervention is not merely a one-off. We feel this is a genuine change in policy. However, the market will need time to assess whether the intervention is a one-off, or not. Thus, we would not expect the NZ$ to decline significantly until later in the year, if not later. Consequently, we have adjusted our forecasts for the NZ$ in the accompanying table than would otherwise have been the case.
On the cross-rates, the main changes have been appreciations against the US$ and the Yen. But these figures were pre-intervention and later figures may reveal a different picture. Either way it appears that there has been little movement against the Australian $.
Even more than usual we must warn readers of the huge margins for error in exchange rate forecasting. With unknown factors in the form of the new policy regarding intervention, and an even more hawkish stance against inflation, importers and exporters should, more than ever, cover risk due to the volatility of the NZ$ in the short term and the probable unwinding of the major over-valuation some time in the future.
Text Size :
|
berl.co.nzBusiness and Economic Research Ltd 2007 Disclaimer: |
 |