New Zealand’s central bank is taking on the currency speculators. This week, it intervened in the foreign exchange market, selling local currency and thus driving the kiwi dollar down by almost 2% against the greenback and the yen. Because the economy has been overheating, New Zealand has been hiking interest rates – last week’s increase to 8% fuelled global worries over dearer money – and this in turn has made it a main destination for the carry trade: investors borrow in currencies with low rates and park the money in countries with higher-yielding assets. This has been a vital source of liquidity for asset markets, and has propelled the kiwi dollar to a 22-year high against the greenback and a 17-year high against the yen – levels that have put exports under heavy pressure.
Intervention won’t make any difference, says the FT. New Zealand’s interest rates are still 16 times higher than Japan’s, and the bank has too little money set aside to influence the exchange rate in the medium term. Small economies “just have to go where the markets take them”.
New Zealand is just a small part of the global yen carry trade, which the Bank of Japan reckons is worth $500bn, says Ambrose Evans-Pritchard in The Daily Telegraph. But the OECD thinks that leveraged carry-trade positions on the derivative markets total $4trn for the yen. So a sharp rise in the ultra-weak currency (note that interest rates in Japan are set to keep climbing) could have a ripple effect across the global financial system. In 1998, the violent reversal of the yen carry trade almost caused a global crisis.