Like the Bank of Canada, the Reserve Bank of New Zealand keeps policy simple. Canada's central bank was the second to adopt an inflation target. New Zealand was the first. Both also are staunch supporters of floating exchange rates, arguing that fighting the market is a losing proposition.
So when Graeme Wheeler, New Zealand's central bank chief, says he intervened in foreign-exchange markets to weaken the kiwi – as he did Wednesday during parliamentary testimony in Wellington – it's worth taking note.
The economies of New Zealand and Canada are subject to the same market forces. The value of their currencies is elevated because the policies of the Federal Reserve in the United States and the Bank of Japan are prompting investors to seek new havens. The Bank of Canada states repeatedly that Canada's economy is suffering in part from the effects of a strong dollar. Mr. Wheeler's move prompts the question: if New Zealand was willing to break orthodoxy, why not Canada?
Mr. Wheeler has been warning speculators that the New Zealand dollar's strength is hurting the economy. The Reserve Bank has stated explicitly in its policy statements that it believes the currency is "overvalued."
But traders, attracted by the Reserve Bank's relatively high benchmark interest rate of 2.5 per cent, appeared willing to test Mr. Wheeler's resolve. The New Zealand currency was almost 1 per cent higher Tuesday against the U.S. dollar than it was on April 24, when the central bank released its latest policy statement, despite more reminders of currency's deleterious effect on the economy.
There comes a point when central banks must back guidance with action, lest the guidance eventually will be seen as hallow. Mr. Wheeler's only move was to show that he wasn't bluffing. The currency fell after he acknowledged that the Reserve Bank had sold from its reserves of New Zealand dollars. It was only the second time the central bank had acknowledged doing so since the "kiwi" was floated in 1985.
So, could New Zealand's intervention herald a future policy shift at the Bank of Canada?
Bank of Canada Governor Mark Carney barely has flinched at the loonie's ascent, putting more effort into arguing against overreacting to a stronger dollar than attempting to talk it down.
But Mr. Carney is leaving at the end of the month and there's reason to wonder whether his replacement, Export Development Canada president Stephen Poloz, might take a different view on the dollar.
David Laidler, a professor emeritus of economics at the University of Western Ontario, where Mr. Poloz got his PhD, said in an interview last week that he thought his former student might put more emphasis on the currency than Mr. Carney.
Comments Mr. Poloz made while chief economist at Export Development suggest he was at least at one time sympathetic to the notion that a currency inflated by a rise in commodity prices could have a devastating effect on the factory sector – the "Dutch disease" phenomenon that Mr. Carney went of his way to debunk last year.
Mr. Poloz isn't talking until after he officially becomes governor at the start of June. Phil Taylor, Export Development's spokesman, said Mr. Poloz's previous remarks should be read in the context in which they were made, and that observers should resist making "dated comments" representative of Mr. Poloz's current world view.
Some other context is important: Canada and New Zealand are in very different places. The New Zealand dollar has surged by about 15 per cent against the U.S. dollar since the start of 2010. Canada's currency gained only about 3.5 per cent over the same period.
New Zealand also is less dogmatic than Canada about the futility of currency intervention. In 2004, the Reserve Bank and the government set out in clear terms the conditions under which the central bank might intervene in foreign-exchange markets. The agreement states the central bank is justified in doing so when the value is "clearly unjustified by economic fundamentals" and when the central bank believes intervention could "avoid destabilizing speculation."
The Bank of Canada's foreign-exchange intervention policy is more ambiguous. Could that change? That's one of many questions the new governor will have to answer.