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RBNZ's Bollard watching other central banks' currency interventions, although has seen little success; Says can't change NZ$ direction

RBNZ's Bollard watching other central banks' currency interventions, although has seen little success; Says can't change NZ$ direction

By Alex Tarrant

The Reserve Bank cannot fundamentally change the direction of New Zealand’s exchange rate and there were very limited circumstances when it would intervene in the currency markets, RBNZ Governor Alan Bollard says.

The New Zealand dollar recently hit a record post-float high of 82.6 US cents, prompting some to ask if the central bank should intervene in the currency markets to sell New Zealand dollars in an effort to drive the currency down.

Bollard told a news conference after releasing the bank's June quarter Monetary Policy Statement the RBNZ had been watching other countries intervene in currency markets with little success, although it was keeping an eye on innovative approaches to currency controls.

Prime Minister John Key waded into the debate yesterday, saying he did not think currency intervention policies worked, although he was happy with the RBNZ’s guidelines that any intervention would be to take the tops and bottoms off the exchange rate’s cycle.

Bollard said the Reserve Bank had always had "very limited expectations about the time and manner in which FX intervention can be effective.”

“In our view, in appropriate circumstances it can have the ability to stabilise the tops and the bottoms of an exchange rate cycle,” Bollard said.

The Reserve Bank did not think it could fundamentally move the trend of the currency as the exchange rate markets were primarily driven by offshore forces, he said.

The RBNZ was also keeping an eye on what other countries were doing, and would keep surveying any innovative approaches to currency controls.

A number of other countries were in the same boat New Zealand had found itself in with exchange rate pressures. Those looking to do things about it often did not have a lot of success, Bollard said.

Govt debt could have effect, but not much

Meanwhile the government’s borrowing requirements could be putting a small amount of upward pressure on the New Zealand dollar, but not at a level that could be accurately measured, Bollard said.

About 60% of the government’s bonds are thought to be bought by foreign investors, requiring them to first have purchased New Zealand dollars, creating more demand for the currency.

“We have in the past seen pressures when New Zealand has had big borrowing requirements, Typically in the past that’s been more though private sector borrowing for housing, and then going through the carry trade and arguably [there is] some pressure on the exchange rate from that,” Bollard said.

“That’s not the case cast now because the private sector is very constrained.

“But as you know the government sector is going through having to fund a very large deficit. If you’re talking about funding that deficit, well something has to be done while New Zealanders are unable or unwilling to fund it themselves,” Bollard said.

“If you’re talking about early pre-funding of the deficit, well that’s something being driven by concerns that sovereign markets can always be more fragile. When there’s a strong interest in particular bonds then it’s sensible to pre-fund,” he said.

“That could at the margin be having some impact on the exchange rate, but not to the level that we could ever measure – I suspect it’s by no means a significant driver of it.”

(Updates with video of Bollard)

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"Oh dear, there's nothing I can do."

What a bunch of wet hand wringing woossies!

Sorry, I just think the RBNZ do a good job controlling the ball and running it over the line, but no one has shown them how to actually score a try. Duh.

Wow look what our $ is doing, its got wings.

Singapore controls it's $ and generates massive current account surpluses.

We plan to run deficits for what will be 45 years to 2015 when we are still borrowing to pay the interest on our ever increasing debt to the tune of 6.9 % of GDP according to Treasuries latest forecasts.

We will have then added some  $ 50 billion  to our foreign debt at that time - assuming someone's still prepared to lend at no doubt ever increasing interest rates.

So - we join the PIGS while Singapore cherry picks our SOE's.

Who would we rather be ?

Right now under current policy settings we don't have the choice.

Hot off the NZMEA presses: 

Revise Reserve Bank Act to tackle dollar

The Reserve Bank Act’s objectives must be changed to include tradable sector growth say the New Zealand Manufacturers and Exporters Association (NZMEA).  Inflation targeting might have worked at the headline level but only at the expense of the tradable sector; domestic inflation has tracked well above the target band.  New Zealand must follow most other developed nations and look to implement alternatives.

NZMEA Chief Executive John Walley says, “The Reserve Bank can claim that under the Reserve Bank Act objectives it’s doing a good job.”

“A quick look at the economy clearly shows this is not the case.  Growth coming out of the recession has been weak despite record terms of trade and strength in two of our major trading partners, Australia and China.  The high dollar is made worse by interest rate differentials between New Zealand and those in Europe and the United States.”

“There are a number of actions the Reserve Bank could take, particularly through capital controls, to strengthen the traded economy and provide faster GDP and job growth,” says Mr Walley.  “While the only target remains inflation these initiatives are not considered.”

“John Key mentioned yesterday that regular currency intervention was unlikely to change the direction of the exchange rate.  This is debatable but in any event other options are available and necessary.”

“Other countries are taking action to lower their exchange rates, whether through quantitative easing in the United States and the United Kingdom, capital controls in Canada and Brazil, direct currency management in China and Singapore, or regulatory prudential mechanisms in Turkey and elsewhere.  We must also act to protect our tradable sector; a change to the Reserve Bank Act would be a good start in this process.”

Hot off the Gummy Bear Herald presses :

      " Alan Bollard is right , Bernard Hickey is wrong ...... again " .........

...... as philthy notes ( below ) do we really want the Reverse Bank tangling in the forex markets with the professionals ...... risking a total screw up , if AB gets it wrong , and leaving the NZ tax-payer on the hook for a mega billion dollar debt ....... a transfer of future NZ earning to the wide-boys , for zero benefit to us ?

Big gun-slingers such as George Soros or John Paulson play this game very successfully , totting up tens of billions for their hedge funds .....

......and whilst they do that ,  in NZ we milk cows . ... Soros & Paulson  don't intrude upon our dairy industry , we would do well to accord them the same respect by not blundering into their zone of operation , or into their cross-hairs ......

[ ... join the dots : .....ERM .......Soros/ Druckenmiller ...... 16/09/92....... British pound ...... Norman Lament ...... ]

Roger - you are dead right, if they played a straight bat. However the lesson from the likes of Singapore is not to play cricket at all - because it's such an easy game to read. In other words to attempt intervention at present using the current approach would be unlikely to work, so back to Singapore for some lessons.

1) They say, here's the finger world, we are going to be different and not play cricket.

2) They control non-tradeables inflation by means other than an OCR regime. We could too, but not necessarily the way they do it by varying individual contributions to their compulsory savings scheme. We could use a suite of ratios to better restrain money supply inflation (where price inflation originates) and take some of the 'signal lag' out of the present OCR regime, by limiting fixed rate loans, as I've discussed before. 

3) They manage their currency in an undisclosed band. The operative word being, undisclosed. They certainly don't say here's our hard peg, play me.   

4) We are often told we couldn't work a system like Singapore because we don't have the reserves, to counter a devaluation attack. Fair enough, but undervaluation is not our problem, we don't need reserves to reduce overvaluation. Granted, we would if RB missed the buy (back) signal. However RB can be the perfect 'inside trader' and be selling down while reducing OCR and tightening with other means, that is, various ratios, etc, see 2 above. Most NZD fx trade is driven by the i.rate differential (look on RB website for a paper by Cassino and Wallis), plus see on John W's blog the article, 'Price or Volume'. So with OCR down, NZD becomes less attractive, as it would when it's realised 1) RB is also not playing cricket anymore, 2) RB will control inflation by means other than a vanilla OCR approach, 3) RB don't even disclose they are working to a band, nevermind a hard peg - it all creates uncertainty and make NZD less attractive. Finally, done well RB makes money and adds to reserves, and they could do well because of 1, 2 and 3 - I think.

All that said, if we could just do item 2 - "control non-tradeables inflation by means other than an OCR regime." - we'd be more than 1/2 way there and maybe not need 3 and 4, given our OCR is so relatively high.


Cheers, Les.


Have updated with video of Bollard answering q's from myself and Bernard (and one from Soper)



What will the NZ$ do if this actually happens 

Well if its a planned thing for a short term I dont see it as doing much....but who knows....

"They (Wall Street) fear even the briefest default would cause a steep climb in interest rates worldwide and a tumbling U.S. dollar, which would tip a fragile economy back into recession and cause financial market upheaval on a scale not seen since the collapse of Lehman Bros."

So maybe it will....the GOP are playing with fire IMHO....but they are a bunch of loons so its not surprising....the spending cuts they want to do will just kill the economy and their future anyway.  They will try and blame the Administration Im sure but really if the American ppl are dumb enough not to see through it they get what they deserve.

NZ Govn has stocked up on debt so we have no immediate need for $s...I assume we just cary on as "normal"....NZ banks might get a fright...or investors might want to put money here so the rates its safer....


The talk about default is over-dramatised. Even if they can't raise more debt, that doesn't mean they default on existing debt. The US easily takes in enough tax to service existing debts. They will have a serious problem with some other spending areas though.

It's also worth noting that none of the Republicans have suggested cuts anywhere near big enough to make a significant difference. So far it's all a bit of US political theatre.

if the American ppl are dumb enough not to see through it they get what they deserve" 

They were dumb enough to elect George Bush so I am sure they are quite capable of following on with this one.

Bollards right he can't do much, and if he tries it could cost the country a lot of money like it did last time, it's stupid to expect him to.

The governments are the ones that can alter policies that make massive differences to the dollar.
It just depends if they are smart or not.

The juries still firmly out on this current lot.

Can't do anything about it. About time we all have a listen to what the little kid is saying about the emperors new clothes.

Why oh why do we keep banging on about not be "able' to do anything about these things. You are kidding yourselves if you think that this "free market" bo11ocks means no manipulation, people there is plenty, it's just it's being done from beyond our shores and not under OUR control. Think about it

The global markets are huge, by far our best protection is to let the value of the NZD float.  The second you try and manipulate/control the market you give the speculators something to push against and make even more money and probably at our loss. So about the only thing I can see to make us less tradeable and take out things like micro-trading is put on a tobin would have to be much, a fraction of a %....and of course we want free trade, to let us sell abroad at the best price without foreign tariffs that implies free movement of money as well....hand in hand.


Ha - Just watching sky national news in Australia and they had a segment on high NZ Vs US.  They went to comment from alan bollard and it was Bernards comment that they played.  The news girl then came back on and said Mr bollard also says .....   it was cracking me up  !!!

Ha - Just watching sky national news in Australia and they had a segment on high NZ Vs US.  They went to comment from alan bollard and it was Bernards comment that they played.  The news girl then came back on and said Mr bollard also says .....   it was cracking me up  !!!