The economists and traders at the Reserve Bank of NZ must be feeling pretty smug right now. They intervened in the currency market on June 11 – selling a huge amount of NZD at between 76.2 and 75 US cents.
The RBNZ has access to at least $7bn to make market interventions, and can intervene to a confidential limit without Finance Ministry approval (which was not required on June 11).
Now generally reserve bank intervention is pissing in the wind – the size of the market so completely swamps the intervention that all that can happen is a momentary pause. That’s what did happen.
So a somewhat useless trade at the time – the blips were only minor, and the tide just kept rising. The Reserve Bank will lose if it tries to fight Japanese housewives and other currency traders.
The NZHerald reported that the RBNZ net sold $702m in June, intervening at least three times. It looks like the bank usually buys about $65m of NZD, so let’s call the interventions $765m. That actually is trivial in currency market terms, but large enough to signal intent.
BUT if it was ineffective, it was ultimately profitable. If the average selling price in June was 75.5 cents, and with Friday’s close at about 69 cents, thats a windfall profit of about $50m USD. Not bad for a few trades, but if the bank was selling leveraged instruments then the profits would be much higher.
From the August 6th article:
In July, the RBNZ said it would refine its foreign exchange intervention strategy, with some of its actions becoming more passive as it left a portion of its reserves unhedged, allowing it to more effectively respond to any sharp falls in the New Zealand dollar.
That bodes very well – meaning the bank was on the right side of the currency adjustment. That means that windfall returns in NZD terms will be much much higher.
As someone that was at school and university throughout the Muldoon currency debacle, it is such a refreshing thing to have a independent Reserve Bank. Well done to the folk there who picked the market.
Unfortunately they didn’t sell enough. They made changes to allow themselves to purchase more foreign currency and then piked out as the kiwi went north.
They realised they sold into a very firm market and backed off thus exacerbating the move higher. Also the market saw the contradiction of raising rates and selling the currency. However, they would have been well within their rights to intervene heavily at 0.80 and just buy as much foreign currency as possible. One day they may need it just to prop up the kiwi :-)
Bollard rectified things somewhat by indicating that interest rates were on hold for now and that helped the currency sell off and then drop into the void as investors pulled the plug.
So well done for intervening but then they lost their nerve and missed out on a chance to flog some more kiwi$.
I really can’t see that this is anything more than luck. They did not intervene to make a profit, they did it to exercise control. They manifestly failed in that and the coincidence of the US market meltdown doesn’t mean they were right to try.
If a George Soros had wanted to game them then they would have been out of luck. This is *our* money (oblig. hip replacement comment here). Do we really want to encourage this kind of behaviour? In the long-term this is even more fruitless than Jim Anderton attempting to pick “export winners”.
If you don’t believe this then think about their consequences if it cost money. There would be none given that the incumbent govt gave them the $$ and the RB only released the quantity involved accidentally.
I would like to think that this capability will be removed in future. It is a direct consequence of a govt rolling in cash that doesn’t have an acceptable (non-inflationary, non-incremental spending) home. Would we allow them to be playing with this amount of dosh in a downturn when we were running a deficit?
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