The Carry-Trade Threat

Today, 1 NZ dollar buys US 76.6 cents. It could get worse.

High interest rates, with the threat of more to come, will keep the NZ dollar at these levels for some time yet. So it is a bit of a 'no-brainer' for the synonymous 'Japanese housewife'. Borrowing Japanese yen at less than 1% and investing in a currency offering a 7%-8% return, is clearly attractive.

What happens though if there is a 'shock' to the global economy. Investors would rapidly 'unwind' risky positions. Carry-Trades are one such risk. The value of the NZ dollar would collapse, negatively impacting on asset values in New Zealand. That would pose a real threat to an already finely balanced economy.

This is not of course an issue for the good ladies of Osaka. They will have cashed up and long since gone. No wonder Allan Bollard must regret having so little to play with. At the end of the day, the fate of the NZ dollar is not really in his hands.