Thursday, April 26, 2007
The RBNZ raised their official cash rate to 7.75%. While they are raising rates they are talking down the currency. The rates need to be so high to curb the various excesses and deficits but the high rates make the currency attractive which contributes to the excesses.
The tightening cycle has lasted quite a while at varying frequency throughout.
There is mixed sentiment on whether RBNZ will hike again and what this means for ongoing kiwi strength or not; on one hand no more hikes means there may be no catalyst for future gains so why buy it but on the other hand it yields 7.25% more then the overnight rate in Japan which is still attractive to many people (even after the next hike in Japan) including local Japanese investors.
It is also possible that this helps Australia as well. The idea is that New Zealand and Australia are so similar (just don't say that to a kiwi) but Australia is thought to be on more surer economic footing than New Zealand.
It will be interesting to see if this news gives a lift to some of the more exotic high yielding currencies like the Turkish lira, Icelandic krona and the Hungarian forint.
The carry trade obviously gets a lot of attention and while I do have some exposure I have been public about having reduced exposure due to concern about market events like the one that happened in February. I think the chance of another shakeout like the one two months ago is pretty good.