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.
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25 Comments
Gummy,
I pondered last week whether the intervention started only after the election, and if so suggested that could be deemed a conspiracy. I noted at the time that if it was commenced beforehand, as it turns out it was, I have no problem, even if they have bought more after the election. Given the RBNZ do not announce when they buy or sell currency, then the fact they didn't announce it this time is also okay.
For $521 million in August the RBNZ could have bought approximately USD438 million, if USD was the currency they were buying. That US$438 million would now be worth NZ$ 556 million, or a profit in a month of $35 million. On printed money.
Having said that the profit or loss is secondary; the main objective surely is to have the NZD not be killing NZ industries.
I want to know if the RBNZ has sterlised the NZD 521 billion injection into the banking system? It was the chinese governments failure to sterlise the printed domestic currency used to purchase local vendor foreign currency export sale proceeds that lead to mal investment.
Or can we assume this will be the NZ administrations method of choice to fund interest payments due on outstanding debt, thus circumventing the possibilty of the indebted resorting to asset sales - read my previous observations in respect of this matter.
Since the Crowns settlement A/Cs at the RBNZ are a paltry NZD 4.862 billion credit it seems a rather large lunch.
Furthermore, I seek to know the recipents of these printed NZD 13.997 billion ( column 4 - Outstanding foreign exchange swap commitments) other than the NZD 7.479 billion lent to the Settlement institutions' balances lodged with the RBNZ.
When Bollard "sold" the dollar down in 2007 (from memory it was the mid 70's c: USD that spooked him) the effect was temporary and by year end 07/08 it was back to 78c. Australia and NZ are currently the best and safest economies in the world ( no thanks to our respective pollies - just minerals and climate) even the suited morons that consitute the global FX "markets" will twig to that. Our two currencies will prevail.
Ergophobia
It is not obvious why house prices would go up. In fact if the NZD is no longer seen as a one way bet for foreigners to make easy money at our expense, then capital flows in for speculation may well slow down. That should ease the housing market considerably.
Many imported items would increase, although in my view ,many would not- it seems to me that many importers/overseas manufacturers over the years have pocketed the extra margin given by our inflated exchange rate. Some of that will unwind as the exchange rate comes down. Think car prices, where many models have been twice the price here compared to the US/ UK over the last 3 years.
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