The scene is set for a battle between the New Zealand Reserve Bank (and presumably the Government) and the market (especially big investors) over the value of the Kiwi dollar and the overall direction of NZ interest rates and the economy generally.
Sounds a bit too big picture doesn't it but yesterday the RBNZ took advantage of a low trading day because of the Australian long weekend, to reveal a surprise intervention in foreign exchange markets that produced a sharp slip in the value of the Kiwi.
Around $1 billion in Kiwis were reportedly sold by the RBNZ.
The move came only three days after the RBNZ and its head, Dr Alan Bollard, produced a surprise 0.25 per cent rise in official interest rates, to a recent high of 8 per cent.
Coming so soon after that rate rise and being the first time the RBNZ has revealed a currency sale type of intervention, it sends a message to markets that interest rates will not rise any further, that the value of the Kiwi dollar has risen to too high a level, and that the balance of the NZ economy is a paramount issue.
Traders said the first ever publicly revealed intervention used a NZ$7 billion fund for stabilizing the currency.
The exchange rate, which fell by the biggest amount since being floated in 1985, was described as "unjustified" by RBNZ Governor, Alan Bollard, in a statement posted on the bank's website.
The $NZ7 billion intervention fund won't be enough if speculators decide to take on the RBNZ.
But with their dealings financed by the carry trade, there's the chance they will decide to cash in their Kiwi profits and sell the currency and buy back yen. That will drive down the value of the Kiwi, and add to the impact of the bank's intervention.
The New Zealand dollar had risen 19 per cent in the past year as speculators have punted on interest moves by the central bank designed to try and limit inflation and control a surging housing boom, which continued last month.
Investors borrow Japanese yen to buy higher-yielding assets, such as the Kiwi (and the Aussie dollar).
The upshot of the intervention is to tell the market that the Kiwi has an upper limit.
The New Zealand dollar traded around 75.17 USc late yesterday in NZ markets, compared to 76.25 USc mid afternoon, just before the sale happened and was revealed to the market. It peaked at 76.39 USc earlier yesterday, the highest since the float 22 years ago in March 1985.
It fell in overnight trading in Europe and the US.
In its statement, the RBNZ said:
"The Reserve Bank confirmed it has intervened today in the foreign exchange market to sell New Zealand dollars.
"Reserve Bank Governor Alan Bollard said: "As stated in our June Monetary Policy Statement, we regard current levels of the exchange rate as exceptional and unjustified in terms of the economic fundamentals.
"This action does not prejudge the future direction of monetary policy, which as always will remain dependent on emerging economic trends.
"The action is consistent with clause 4(b) of the Policy Targets Agreement, which requires monetary policy to avoid unnecessary instability in the exchange rate."
The intervention willsend a message to the country's exporter that the authorities will not allow the dollar to riseto levels that would cut returns even further, or force more manufacturers and exporters offshore.
The rate rise last week was justified by the bank in terms of a strong housing market and rising consumer spending boosting inflation.
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That was reinforced earlier yesterday when it was revealed that NZ house values rose 11.1 per cent more in the three months to May 31, well above the corresponding quarter of 2006.
NZ Quotable Value said the rise in the residential price index compared rises of 10.6 per cent gain in April and a 9.8 per cent gain in March.
And the average national sale price increased from $NZ366,032 ($A327,604) to $NZ372,552 ($A333,439).
It's clear that the earlier rate rises this year by the RBNZ have not had any impact on the market, despite the rise in some fixed home loan rates. (80 per cent of all NZ home loans are fixed, meaning it takes a very long time for rate rises to impact the housing market, unlike Australia where 80 per cent of home loans are variable).
Last week's moving of the Official Cash Rate to 8 per cent was the third straight rate increase, following increases in March and April.
Prices in the capital, Wellington, rose 13.3 per cent, Christchurch 12.4 per cent on a year ago, and Auckland, 7.5 per cent.
The monthly residential price report is based on sale prices of properties over the past three months compared with sales over the corresponding three-month period of the previous year.
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And continuing high levels of dairy exports helped New Zealand's merchandise terms of trade rise 2 per cent in the March quarter.
Figures from Statistics New Zealand (SNZ) showed a 3.2 per cent fall in meat prices, offsetting a 2.8 per cent rise in dairy prices in the quarter.
Overall export prices were down 0.2 per cent, while the merchandise import price index fell 2.1 per cent in the quarter, with falls from a 3.7 per cent drop in mechanical machinery prices and a 3.6 per cent fall in petroleum and petroleum products.
Those declines came from the impact of the sharp rise in the Kiwi dollar (and should have had some impact on prices in the economy at large).
Seasonally adjusted export volumes rose 2.4 per cent in the March quarter from the December three months.
The dairy product index lifted 10.2 per cent, adding to high volumes of dairy exports recorded since the June 2006 quarter, SNZ said.
Fonterra, the biggest dairy exporter in the world, said last month that a 60 per cent rise in world dairy
