from Follow the Money

Paulson may (or may not) have a strong dollar policy …. New Zealand, though, clearly doesn’t have a strong kiwi policy

September 27, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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It is perhaps a sign of the times that the US is encouraging China to provide the US with a bit less financing (the US of course, has a strong RMB policy, not a weak dollar policy) and New Zealand’s Finance Minister is practically begging for a bit of market discipline to help keep New Zealand’s 10% of GDP current account deficit from growing any larger. Gillian Tett and Steve Johnson in the FT:

“I think someone would have to be slightly strange to take a bet on the NZ dollar right now,” Mr Cullen told the Financial Times. “It is strange that with our current account deficit approaching 10 per cent, the market is not factoring it in.

“Just how badly do we have to do on the current account before [investors] notice?”

His comments follow a recent, sharp rally in the New Zealand dollar, which has left it hitting a seven-month high against the US dollar this week of about $0.67 – even though data last week showed the country running a current account deficit of 9.7 per cent of gross domestic product.”

Mr. Cullen's question is a good one.

Carry trades – borrowing in a currency with a low interest rate to buy a currency with a high interest rate – didn’t necessarily do all that well in the first half of the year.    Iceland blew up – and most carry trades had a rough May and June.  Turkey is the most prominent example. But things changed over the summer.  Most high-carry currencies bounced back – particularly in countries that raised interest rates after sell-off.  The Krona is one example.  The Turkish lira is another.   The Brazilian real too –  Brazil’s central bank has been intervening heavily to keep the real from rising even further.  And the Kiwi


The recent bout of turmoil in the emerging world – the Thai coup, the bout of honesty from Hungary’s prime minister and the like  -- seems to have led some investors to conclude that they were perhaps under-pricing risk in the emerging world (See Danske Bank)

But it didn’t seem to dull investor’s appetite for the high-carry currencies of developed island economies.  At least not enough to satisfy New Zealand’s finance minister. 

Another potential explanation for the Kiwi’s strength? 

Yen-financed carry trades are still going strong, with investors borrowing yen to buy Euros, US dollars and New Zealand dollars.   But dollar financed carry trades – borrowing dollars to buy the currencies of high-yielding emerging economies – became just a bit less attractive recently

Or maybe it was Swiss franc financed positions that pulled back.

I am not close enough to the markets to have a great sense of precisely what has been happening …

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