NZ dollar slumps below US68c after warning

The New Zealand dollar slumped below US68c for the first time this year today following reports New Zealand officials had warned Japanese investors to steer clear of investing here.

The kiwi traded as low as US67.67c overnight -- over a cent below yesterday's opening level.

The foreign exchange market was abuzz with rumours yesterday that officials had been to Japan to deter institutions from issuing more uridashi bonds -- bonds issued in Japan but denominated in a foreign currency such as the New Zealand dollar.

The Reserve Bank today confirmed a visit to Japan late last year to warn Bank of Japan officials, capital market participants and a range of issuers of the risks associated with uridashi bonds.

"Officials from the bank and Treasury have travelled over the last couple of months, and in the normal course of their business, we have taken the opportunity to talk to the key players in the uridashi markets to better understand these markets and to ensure that the risks associated with the uridashis are understood," a spokeswoman said.

Asked if it was unusual for New Zealand officials to talk down inwards investment, she declined to comment. However, she said the Reserve Bank had issued documents in September on imbalances in the economy and the role that capital markets played.

"It's nothing new. We've been saying it for I don't know how long," she said.

National Party finance spokesman John Key, a former senior dealer and merchant banker, told The New Zealand Herald it was "truly bizarre when you have New Zealand officials trotting offshore to tell Japanese investors our economy is in worse shape than they thought it was.

"The Reserve Bank is whistling into the wind if they think they are going to convince Japanese retail investors not to continue to buy uridashi issues."

Mr Key said Japanese investors were responding to high New Zealand interest rates and if the Reserve Bank wanted to reduce the appetite for this investment, it needed to cut rates.

Employers and Manufacturers Association chief executive Alasdair Thompson said the move was unprecedented, but practical as the exchange rate had to come down to help exporters and to held rebalance the massive current account deficit.

"To explain that in Europe and in Japan is not unreasonable at all."

Federated Farmers board member Hugh Ritchie expressed concern about the Government intervening to influence the dollar.

"If the dollar fell that would be good for exporters, but going and telling countries not to buy our dollar is a somewhat unusual method."

ACT leader Rodney Hide we had "the perverse scenario of (Finance Minister) Michael Cullen and his top officials trying to persuade people from investing in government stock by saying it's not a good deal".

United Future leader Peter Dunne feared it was "a very short step from there to direct intervention in the foreign-exchange markets".

Foreign investors, mostly Japanese retail investors, attracted by New Zealand's high interest rates, have piled into the bonds -- to the tune of $25.3 billion in 2005.

That has largely funded New Zealand's massive $12 billion current account deficit as well as much of the borrowing that has funded the housing market boom and consumption spend-up.

A spokesman for Dr Cullen said what occurred was "normal practice".

Bank of New Zealand currency strategist, Sue Trinh, said the talks were rumoured to have led to the cancellation of a $600 million uridashi issue this week.

Uridashi bonds offer Japanese mum and dad investors returns of around 5 per cent annually compared to local rates of next to zero but when the exchange moves heavily against them those losses far outweigh the higher dividends.

Both RB governor Alan Bollard and Dr Cullen made public speeches at the end of last year warning about the unnaturally high New Zealand dollar in recent months.

Dr Bollard has had to hike interest rates nine times since the start of 2004 as he has grappled with inflation above the 1-3 per cent target band, indirectly fuelled by the runaway housing market, in turn has been fired by the cheap loans from overseas.

Every time Dr Bollard has hiked interest rates, it has encouraged more investment from Japan and pushed the currency higher while driving the export orientated sector of the economy further to the wall and exacerbating the current account deficit.

A major survey this week by the New Zealand Institute of Economic Research showed the country is on the brink of a recession with business confidence at a 20-year low.

The Reserve Bank formally reviews interest rates on Thursday and the prospect of further rate hikes signalled before Christmas have now evaporated.

ANZ chief foreign exchange dealer Murray Hindley said that officials steering investors away from investing here was certainly a negative signal for the currency. He expected more downward pressure on the kiwi as other investors liquidated positions.

- NZPA