Reserve Bank sold a net NZ$521 mln during August in biggest monthly currency sale since July 2007

The Reserve Bank sold a net NZ$521 million during August in a successful effort to help push the Kiwi lower, figures released by the central bank show.

It's the Reserve Bank's biggest monthly currency intervention since it bought a net NZ$525 million in March 2011, and its biggest sale of New Zealand dollars since selling NZ$1.489 billion in July 2007.

The NZ dollar was at US77.79c and A89.23c shortly after 3pm. It was down from about US78.30c prior to the confirmation of August intervention.

Speculation of Reserve Bank intervention gathered steam on August 25 after the NZ dollar suddenly dropped about half a US cent to US84.55c. The Reserve Bank declined to comment at that time.

Then last Thursday afternoon the Reserve Bank issued a statement quoting Governor Graeme Wheeler saying the level of the Kiwi was unjustified and unsustainable and it was susceptible to a significant downward adjustment over the next six to nine months. The move was a surprise, not in terms of what Wheeler said, but because of the issuing of the statement complete with detailed explanation from the central bank.

Putting its money where its mouth is

ASB chief economist Nick Tuffley said the Reserve Bank had put its money where its mouth is.

"The Reserve Bank is being more activist in its attempts to pull down the NZ dollar through both talking more forcefully about the unsustainability of the high NZ dollar, and keeping the market off balance.  These actions are intended to have market participants realise that a higher NZ dollar is not a one-way bet," Tuffley said  

"The RBNZ has been pragmatic about the effectiveness of active NZ dollar intervention.  But it is, nonetheless, having some success in reinforcing the downward trend in the NZ dollar that has been in place since July.  Last week’s statement about the NZ dollar was one such example of engineering added weakness in the NZ dollar without having to take on added foreign exchange risk."

"Under Graeme Wheeler the Reserve Bank is prepared to try different actions to achieve its objectives.  One other example is the introduction of LVR (loan-to-value ratio mortgage) restrictions last year, something the previous Governor did not see value in," Tuffley added.

"We don’t rule out further tactical actions from the RBNZ to keep downward pressure on the NZ dollar. Now that the NZ dollar is trending down, it is easier to reinforce that trend than fight against an upward trend."

Prime Minister John Key today said the New Zealand dollar's fair value is around US65c, and it would be logical for the Reserve Bank to intervene to push the Kiwi lower, given it's well above where it's fundamentally fairly valued.

What about September?

We'll likely have to wait another month to see whether the Reserve Bank also intervened to push the Kiwi lower during September. The NZ dollar has certainly weakened during the past couple of months. From a high of US88.21c on July 10, it began September at US83.58c, and is now below US78c, meaning it's down about US11c since mid-July.

Westpac's chief economist Dominick Stephens and senior economist Michael Gordon said they wouldn't be surprised to see further Reserve Bank selling of the NZ dollar over following months post August, although there had been no rumours of September selling.

"Market conditions are clearly 'opportune' given that sentiment has turned sharply against the commodity currencies and in favour of the US dollar. And the surprise statement released by the Reserve Bank last Thursday suggests that it still sees the NZ dollar as unjustifiably high even after the fall in the currency to date," Stephens and Gordon said.

Helping push the Kiwi lower, and the greenback higher, is an expectation the US Federal Reserve will start increasing interest rates next year.

There has also been a big drop in dairy prices, with the Reserve Bank highlighting last week global dairy prices have fallen by 45% since February. Fonterra has cut its milk price from $8.40 per kg of milk solids in the 2013/14 season to a forecast $5.30 per kg of milk solids this season, meaning dairy farm incomes will be about $5 billion lower. This is equivalent to a 2.2% decline in New Zealand's GDP.

In April last year the Reserve Bank sold a net NZ$256 million of Kiwi currency. With Wheeler saying the central bank had intervened in a limited way to knock the top off a rally in the currency. That April 2013 intervention was the largest since the Reserve Bank sold NZ$511 million in May 2008 under previous governor Alan Bollard.

The Reserve Bank sold NZ$2.25 billion in its first two months of larger scale intervention in June and July of 2008, including a record NZ$1.489 billion in July 2008.

The last major Reserve Bank intervention was in late 2007 and early 2008 under the previous Labour Government. Back then the Reserve Bank sold NZ$3.9 billion of New Zealand dollars in the year to May 2008.