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)