KEY POINTS:
Exporters hoping for a big exchange rate drop following the Reserve Bank's currency intervention yesterday are likely to be disappointed, says Westpac currency strategist Michael Gordon.
"For the average exporter this won't lead to sustained fall in the currency. It's more about taking the very peak off the
exchange rate cycle," he said.
"The evidence from other countries that have [had intervention] suggests that you get what you pay for - it tends to mean very short-term small movements in the currency."
Reserve Bank Governor Alan Bollard yesterday confirmed the bank had intervened to sell the currency, saying the dollar's climb was not justified by the nation's economic outlook.
The export sector cheered the move.
Export NZ chief executive Bob Walters said it showed the bank recognised how serious the currency situation had become.
"It shows that [Bollard] is prepared to do whatever he can within the framework he has and to that extent it's encouraging."
Gordon said that even if the impact of the intervention was short-lived it could provide exporters with some opportunity to hedge their currency needs.
"More intervention will tend to lead to some short-term weakness in the currency, [and] I'd see as opportunities for exporters to lock in hedging."
ANZ National Bank chief economist Cameron Bagrie agreed that the move showed the real concerns the bank had for the export sector.
"It's not the sector that they've got under the gun, it's the housing market but they're trying to deliver bitter medicine to one side of the market and minimise collateral damage to the other."
The bank wasn't expecting to drive the currency down long term, but it was sending a strong message.
"I don't think it's going to be the sort of intervention story where you try to chase the New Zealand dollar a country mile down," he said.
"They've delivered a wake-up call to foreign markets that they are not toothless."
Bagrie judged the move to be a success, based on the initial market reaction at least.
The dollar plunged from above US76c yesterday morning to US75.3c by 3pm as rumours of market intervention swept through Asian markets.
By 8.30pm yesterday it was at US75.1c.
But the timing had come as a surprise and had left the market a little perplexed, Bagrie said.
"At the end of the day the Reserve Bank is talking tough on June monetary policy ... so it's a bit bemusing as to why you'd be intervening when you're still considering hiking rates. So we're scratching our heads."
Business New Zealand economist John Pask argued that by intervening, the Government had set a questionable precedent.
The move could expose the taxpayer to considerable risk, he said.
"If they get it wrong - if the exchange rate goes up - they'll effectively lose on it and will have to go to the market and buy currency at a higher level."
ANZ head of markets John Body said the success or failure of the currency play would be decided over the next 48 hours as Asian investors absorbed the news.
The bank had sent a strong message to foreign investors that buying and holding the kiwi was not a one-way trade.
"They showed that when the currency reaches levels deemed to be unjustifiable, that it is very dangerous, if you're a carry trader, to be buying kiwi at those levels."
Body's initial impression was that the intervention had been a success.
"I think we'll see the kiwi lower in the next 48 hours, possibly under US74c."
Intervention was an effective tool if it was used sparingly, he said.
"When you intervene for the first time it has a lot of leverage."
It was debatable whether the move was in line with policy but the opportunity had presented itself and the bank had acted, he said.
The price spike above US60c at the weekend, combined with the market holiday in Australia (which meant trading was thin), was enough for them.