OK, cards on the table … I’m a sceptic.

But, here’s BoA Merrill Lynch’s argument for the Reserve Bank of New Zealand intervening in the New Zealand dollar ….

I”ve reformatted it a bit to make it more readable:

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Whereas previously we believed that not all of the criteria was met and it was considered more jaw boning by the RBNZ’s Wheeler , if we have a look at each criteria now it paints a very different story.

  • The NZD is exceptionally high or low – TICK – NZD has traded to 0.8835 in July 2014 a whisker away from the all time high of 0.8842 in August 2011. In addition the TWI traded to an all time high of 82.03 in July 2014.
  • In the RBNZ’s assessment, the level of the exchange rate is unjustified by economic fundamentals – TICK – they acknowledged that in today’s OCR with the comment “With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable”
  • Intervention will be consistent with RBNZ’s Policy Target’s agreement (PTA) – TICK – The implication the RBNZ is pausing in rates would suggest that the inflation target is consistent with the PTA which is basically targeting the mid point of a 1-3 % inflation band. Last print of CPI YoY came in at 1.6 % .
  • Market conditions are opportune and there is a material prospect of success, i.e. influencing the exchange rate – TICK – The RBNZ has acknowledged they believe the currency has the potential for a significant fall. The market is very long NZD due to the carry trade build up – … NZD/JPY chart shows we are starting to break lower

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Like I said, I’m a sceptic … but,

  • Maybe they can give it a nudge and do a good bit of damage
  • Graeme Wheeler is a clever chap
  • Maybe I’m wrong
  • Maybe the market is going to take a look at how heavy the NZD is and sell it anyway
  • This sort of talk is NOT confined to BoA/ML … its doing the rounds