• Updated February 22, 2013, 10:31 a.m. ET

FX MATH

New Zealand Toppling Japan PM's Yen-Weakening Plans

By VINCENT CIGNARELLA

New Zealand isn't entering the latest currency war, it's declaring the end.

On Wednesday, Reserve Bank of New Zealand Gov. Graeme Wheeler said the New Zealand dollar is "significantly over-valued," and the central bank will intervene in foreign exchange markets "when the circumstances are right."

The comments were the latest from a global central banker or government head aimed at directly changing the value of a country's currency. The most significant development in this so-called currency war has come from Japan, where Prime Minister Shinzo Abe has for three months pushed for aggressive policy action, with the yen falling broadly during that time.

Mr. Wheeler's threat of intervention, however, will prove unnecessary. The commodity currency carry trade has been the real driver of yen weakness and it is now coming to an end.

Starting in early February, commodity currencies began to weaken against the yen. The Canadian dollar is off more than 3.0% and the Australian dollar just over 1.0%.

The last of the three commodity currencies, the New Zealand dollar, is about to rollover as well. With that turn, investors will exit commodity currencies, halting yen weakness and at the very least call a truce in this currency war.

A turnaround for the kiwi would come after a broad run up. Since late November, the New Zealand dollar strengthened more than 16.0% against the yen. Partly behind the move, 10-year bonds in New Zealand yield 3.87% while the country posted annual inflation of 0.9%. In Japan, 10-year bonds yield 0.72% with virtually zero inflation.

An analysis of Elliott Wave theory shows all three commodity currencies have only just begun to decline against the yen. The Canadian, Australian and New Zealand dollars have completed a third wave and are now targeting a fourth wave lower with the New Zealand dollar pointed to having the largest decline with a retracement to the 50-day moving average of Y74.93, a drop of more than 4%.

The technicals are further backed by policy signs. When the broad yen weakness began, Japan's Prime Minister Abe was calling for an economic stimulus package of $118 billion and an increase in the country's inflation target from 1.0% to 2.0%. For good measure, he threatened the Bank of Japan if it didn't get on board.

But lately, there has been some pushback on the prime minister's decree, such as when Japan Finance Minister Taro Aso on Tuesday said he wasn't considering buying foreign bonds. A policy tool favored by the prime minister to weaken the yen.

In the case of Mr. Abe's rhetoric, the term currency war is a misnomer of sorts. It is a catchy phrase that masks nothing more than a common carry trade--a type of trade where investors sell a low-yield currency and buy a high-yield currency, hoping to earn the highest potential yield differential.

Carry trades like this one often end with little warning and make a big mess. If commodity currencies plummet against the yen, the rest of the trades married to yen weakness could go with it.

Investors in such positions would be advised to put down the sword, the war is over.

—(Vincent Cignarella is a currency strategist/columnist for DJ FX Trader and co-inventor of The Wall Street Journal Dollar Index, with 30 years experience in currency markets including as a bank dealer at major money-center commercial banks. He can be reached at vincent.cignarella@dowjones.com.)