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RBNZ Governor Wheeler lets slip in parliamentary committee meeting that RBNZ has intervened to 'take top off NZ$'; currency falls 60 bps in following minutes

Currencies
RBNZ Governor Wheeler lets slip in parliamentary committee meeting that RBNZ has intervened to 'take top off NZ$'; currency falls 60 bps in following minutes

By Bernard Hickey

Reserve Bank Governor Graeme Wheeler has let slip in a parliamentary committee meeting that the central bank had been quietly intervening in the currency markets to 'take the top of the rallies', triggering an immediate 60 basis point fall in the New Zealand dollar to 83.9 USc by mid-afternoon.

Wheeler had been asked whether the Reserve Bank had ruled out intervening in the currency, which the bank has described in recent months as 'significantly overvalued'.

"We have indicated on the record that we are prepared to intervene in the exchange rate. We would not expect, given the strenghth of the flows, that intervention would materially change the level of the exchange rate, but we could potentially take the tops off rallies, and in terms of activity, there has been some (intervention)," Wheeler said.

The currency market intervention would be the first under the current Governor since he began his first term in September 2012 and it would be the first since the election in November 2008 of Prime Minister John Key, a former currency trader who has repeatedly said currency intervention does not work. The Reserve Bank intervened to drag the New Zealand dollar lower in June/July and August 2007 (NZ$2.4 bln) and then again from February to May 2008 (NZ$1.6 billion). Wheeler had repeatedly said since September that the Reserve Bank believed currency intervention would not work and would be too risky.

Green MP Russel Norman then followed up to confirm that the Reserve Bank had intervened in the last month to bring the currency down. Wheeler and his Deputy Governor Grant Spencer then confirmed the intervention and said it would become evident in Reserve Bank balance sheet figures due out monthly.

"It will become evident in the data that is published every month," Spencer said, confirming intervention within the last month when asked by Norman.

Here are the latest figures, which show the bank sold NZ$199 million in December, and a further NZ$31 million in February and March. The figures for April are due out on May 30.

Wheeler had been presenting the Reserve Bank's half yearly Financial Stability Report to Parliament's Finance and Expenditure Committee. Earlier he had repeated that the New Zealand dollar was "significantly over-valued", potentially to the extent of the 15% estimated by the IMF.

Labour MP David Cunliffe had asked Wheeler whether he would rule out future intervention in the 'spot' market to sell the New Zealand dollar and whether the bank's framework had changed to rule out intervention. He also asked if the intervention was designed to surprise or shock speculators into realising the currency was not a one way bet.

"That's part of the signalling, that's right, particularly when prices are getting stretched and you're seeing these peaks and speculative flows. But I would add that a lot of the flows over the last year or so have related to official sector flows, in other words central banks and sovereign wealth funds diversifying out of the major currencies," Spencer said.

The admission in answer to questions in a parliamentary select committee hearing suprised committee members. The last time the Reserve Bank intervened seriously was in mid 2007 under previous Governor Alan Bollard. Back then it issued a formal statement to confirm activity in the market. 

English confirms move

Finance Minister Bill English later confirmed the Reserve Bank had advised the government of the intervention, but the government was comfortable it was not on a scale that was too risky for the government.

"We want to be sure they aren't taking very large risks on the back of the taxpayer and I'm quite reassured that that is the case," English told reporters in Parliament.

"They know they can't beat the whole market, but there are limited circcumstances where they believe they can influence the exchange rate," he said.

"It makes some difference at the margin, but it's hard to tell because you don't know what would have happened if they hadn't intervened."

Market reaction

Westpac Chief Economist Dominick Stephens described the admission as "an ex-post acknowledgement of covert intervention."

"The final option open to the Reserve Bank is "overt intervention," Stephens said. "In this case, the RBNZ would announce its intentions at the same time as selling NZD," he said.

It was impossible to tell if the intervention through April had affected the currency, the admission today had had an impact and it could fall further in overseas trade overnight.

"This is significant, but we expect the drop in the NZD will be short-lived. In June and July 2007 the RBNZ sold billions of NZD in an overt intervention. The NZD fell one cent, but regained its previous level within a week," Stephens said.

"Subsequent interventions in 2007 had diminishing marginal effects on the value of the NZD. In this sense, we agree with the RBNZ's own assessment of the effectiveness of intervention in the foreign exchange market. Intervention is capable of having a short-term impact, or in the Governor's words, "taking the tops off rallies." However, we also agree with the Governor's other comment that "we would not expect any intervention would materially change the level of the exchange rate." This is an important development for markets on the day, but not a game-changer for the New Zealand economy."

(Updated with details, fuller quotes, background, Bill English's reaction and market reaction)

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24 Comments

Quietly and small without doubt - nobody will take him on if the stakes are piddling and not worth starting a short squeeze. 

 

So, has the Governor defied John Key's better judgement?

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My guess would be no on that Stephen H, quiet and piddling would have been an exercise in seeing what sustainable influence they could apply to the currency without attracting too much attention to their position of redundancy on the matter.

 But hey ...it's something, something is not nothing, of course the cynic in me looks for Key's advantage on it...or more correctly Corporate benifits from early warning, I guess we'd have to watch Fonterra's next  profit divisions to gain a better idea.

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And all yez common taters said that he was only capable of open-mouth operations....

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P.S. a little overly sensational Bernard, would be better to see it take than to get all hyped up there , just to watch the Balloon deflate with the sound of a limp fart.

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Sound of a limp fart? Or a reticent whoopie cushion?

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I wonder if the RBNZ's actions loosened ANZ's grip on it's reported NZD 187,985,000,000 notional foreign exchange derivative trading position? View, note 11 page 25

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Bugger me Stephen H,  there's a collision in the making there....

Bernard...you there Bernard.. ! wake up man, get to dissecting this PDF what Mr Hulme has kindly furnished you with....there is a story here for a Journo with a nose for grubby doings...now where's Gareth got to..?  what is that your running there a holiday camp..!?

Get in there and bring us some grot...never mind their advertising contract...dig that dirt.

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Yep, it is one hell of a bail-in exercise, once the netting fails along with the collateral chain underpinnings. Which, let's face it, has happened before to the likes of Bear Stearns, Lehman Brothers, AIG etc -  their counterparty banks made sure as they exercised their legal right to do so.

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While I would consider the Reserve Bank acting to definitely be news, I would temper this by noting it is well within range of daily fluctuations of the dollar (see for example the movements a couple of weeks ago). 

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FYI udpated with fuller quotes and reaction from Westpac's Dominick Stephens

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Cheers B.H. but Dominic took all day to say what I just said further up in two sentences .

 Of course he is an economist...bit like a B.A. with some math n diplomacy tossed in .

 Ironic isn't it Bernard, we have an economy described as punching above it's weight.......

and a Governor equal to the description, charged with it's safe keeping.

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is it as big as George Soros'  billion dollars offload on the AUD yesterday?

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NZD getting a clip around the ears at this very moment

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I see that about half an hour after the NZ dollar depreciated rapidly against the U.S., the Australian appreciated by a similar amount. This leaves me wondering if the movements are the result of general International factors rather than Wheeler's commonents. 

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FYI have added Bill English's confirmation of the intervention and him downplaying the possible size of it.

cheers

Bernard

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"It makes some difference at the margin, but it's hard to tell because you don't know what would have happened if they hadn't intervened."

 

You beauty - lucky the Governor has tenure that extends to his retirement.age.

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Good story Bernard , I have been saying this is necessary for weeks if not months . The mere fact that it has been acknowldged should help to weaaken the Kiwi

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To what end?

 

We recently discussed the 'dead-weight' problem of youth unemployment in developed economies. The Economist estimates that the world's population of NEETs (not in employment, education, or training) is a stunning 290 million - or around one-quarter of the world's youth.

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I'd love to think so Boatman, but I doubt it. Sentiment for this sort of thing lasts about 5 mins in the FX markets - its got to be backed up with more action, and in volume, or we'll just get a bounce back with days. But the Aussie is under some presuure from the likes of the Soros' who are negative on it as a reflection of China and lower hard commodity price story, so a lower AUD migbht have the required affect anyway for the NZD - its likely to be one of the contributing factors as to why the RBNZ decided to act this month as they're cannon fodder on their own.

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I guess any exporter will suspend expansionary activities and wait to see what happens next - no point in locking in a sale at the market determined rate, when those of authority and wealth are in selling for our future advantage. What's a good level to restart the business?  In the meantime should I send my son and his wife to Europe for the summer season?

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What do you make of Fonterra's Average Currency Rate (FACR)

https://www.nzx.com/files/attachments/174824.pdf

also in DC's item this afternoon.

 

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Henrry_Tull, the chart lacks important information - but I hope for dairy farmers sake it means Fonterra has open long NZD/USD positions above 0.8000. But, in what magnitudes? - inability to make good on the USD short due to a lack of receipts is not hedging - I guess they have made adjustments. Recent actions (24 Hours, or more if warned) would have given cause to write out of the money calls and delta hedge if events drag in a big spec buyer.

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If warned indeed, that is why I mention it in the post at top, should become  a measured guess retrospectively speaking .

 But what does it say about  the independence of the RBNZ, if that was the case..?

 Sure we have to protect our export interests, but what are we saying here really..?

 Cows n Banks, Cows N Banks..eggs n basakets..eggs n baskets...time n bombs.

 wall ...ass...nails.

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