Latest monthly figures from the Reserve Bank reveal our central bank has seen a decrease in its 'foreign currency intervention capacity' of NZ$732 million last month - the first drop in a year

The Reserve Bank has seen a NZ$732 million decrease in its so-called 'foreign currency intervention capacity' in the past month.

This is the first such decrease in a year and follows a steady and at times sharp rising in the amount of foreign currency intervention capacity that has seen the amount available to the central bank rise from normally around NZ$12 billion to over NZ$20 billion. 

It needs to be stated that the Kiwi dollar did rise in value against the US currency during May (by about 2.7%), so, that could have had some impact when doing the unrealised translation of US holdings in NZ dollars.

Early in 2023 the RBNZ announced that - in effect it would be building up a war chest of foreign currency in the event that it needs to intervene in the foreign exchange markets. 

The central bank indicated that the amount it had available would be rising in future months. But it gave no indication of by how much this would be, or what the ultimate size of a war chest might be, or when that might be accomplished.

According to figures for May released by the RBNZ, its foreign currency intervention capacity shrank in the month from April's peak level of NZ$20.978 billion to NZ$20.246 billion.

It should be stressed, however, that the RBNZ has not sold or bought any currency in the past month. There are various other ways and means of affecting the foreign currency intervention capacity.

In a speech last year RBNZ Assistant Governor Karen Silk said there was no clear answer to the question of what the right level of foreign currency reserves the Reserve Bank (RBNZ) should hold.

"We will not be commenting on the target level of reserves agreed as that information is considered market sensitive but will note that achieving it is a process that will occur over a number of years. This is because we seek to avoid undue risk to market liquidity from our actions in reaching agreed levels," Silk said.

Silk explained in her speech some of the ways in which the foreign currency holdings are increased:

"Unhedged reserves are raised by selling NZD in exchange for foreign currency in the spot foreign exchange market. This transaction results in us owning foreign currency, and the value of these assets will fluctuate in line with increases or decreases in the exchange rate," says Silk.

"The hedged reserves are raised by lending NZD in exchange for foreign currency, generally in the cross-currency basis swap market. We effectively borrow foreign currency under long term contracts and are not exposed to movements in the exchange rate, because all the foreign exchange rates are agreed at the start of the contract."  

The RBNZ describes the foreign currency intervention capacity as foreign currency assets that are readily liquefiable less foreign currency liabilities that fall due in the next 12 months.

Various other pieces of background on this issue are available in this article.